Method 1: Discounted Cash Flow

The first valuation method—discounted cash flow (DCF)—is one of the most popular because it takes account of the future prospects, not just the historical performance of the company. DCF bases the valuation of a business on the net present value of projected cash flows. Future cash flows are given a present-day value by applying a discount rate specific to your target company.

To understand DCF, let’s first establish some basic concepts. As everyone knows, a dollar you hold today is worth more than a dollar you expect to have five years from now. That’s why, in the consumer world, one always pays more for an installment plan than for an immediate cash purchase. When you are buying a company, you are buying future ...

Get Successful Acquisitions now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.