Discounted Cash Flow (DCF)

Discounted cash flow (DCF) is a valuation method that estimates the present value of a business by projecting its future cash flows and discounting them back to today's value using a rate that reflects the risk of those cash flows (the discount rate or weighted average cost of capital).

DCF is most commonly used for businesses with predictable, multi-year cash flow projections — such as businesses with long-term contracts, SaaS subscriptions, or stable recurring revenue. It is less commonly used for small business sales, where historical earnings multiples (EBITDA or SDE multiples derived from comparable transactions) are the standard approach.

The DCF method is sensitive to assumptions about future growth and the discount rate. Small changes in either input can significantly change the calculated value, making independent review of DCF assumptions a critical step in valuation due diligence.

See also: Business Valuation, EBITDA, Comparable Transaction, Fair Market Value.