Glossary · Valuation

Discounted Cash Flow (DCF)

DCF values a business by discounting future free cash flows: typically 5 to 10 years plus a terminal value: at WACC; produces an intrinsic value estimate independent of market multiples.

Definition

DCF is the academic standard for business valuation. The method projects free cash flows over an explicit period (often 5 years), estimates a terminal value for everything beyond (Gordon growth or exit multiple), and discounts both at the Weighted Average Cost of Capital (WACC). The result is enterprise value: independent of what the market pays today for comparable businesses.

For Benelux SMEs DCF is useful as a second opinion alongside EBITDA multiples, especially for growth businesses where current EBITDA understates future cash flow. The pitfall: DCF is enormously sensitive to growth rate and WACC assumptions: a 1% shift in either can move value by 25-40%. Buyers use DCF to validate high multiples, not to set them.

Formula

Enterprise value = ∑(FCF_t / (1+WACC)^t) + Terminal Value / (1+WACC)^n

Worked example

A Ghent SaaS business: year 1 FCF €450k, +12% growth for 5 years, then 2% terminal growth. WACC = 11%. Result: PV of explicit years ~€2.3m + PV of terminal value ~€4.1m = enterprise value €6.4m. Sanity-check with EBITDA multiple: €750k EBITDA × 8x SaaS = €6.0m. Two methods triangulate to the same band: defensible.

When it matters

For growth businesses where EBITDA multiples understate future cash flow (SaaS, scale-ups), for businesses with upcoming capex investments that depress short-term EBITDA, and as a second method to validate EBITDA-multiple valuations. Not the first choice for stable SMEs with good sector comparables.

Method: DCF in detail

Frequently asked

When is DCF better than an EBITDA multiple?: For growth businesses where current EBITDA doesn't reflect future cash flow, for businesses with upcoming capex that depresses short-term EBITDA, and when sector multiples are missing (rare specialist sectors). In classic SME transfers the EBITDA multiple remains first choice.
How sensitive is DCF to assumptions?: Very sensitive. A 1% shift in WACC or terminal growth rate can move value by 25-40%. Always provide a sensitivity analysis: e.g. DCF value at WACC 9% / 10% / 11% and terminal growth 1% / 2% / 3%.
Which cash flow should I use?: Free Cash Flow to Firm (FCFF): EBITDA − taxes − capex − Δ NWC. Not EBITDA itself: that overstates by ignoring capex and working capital. For the first 5 years use realistic business-plan figures; then a linear or tapering projection.

Related terms

WACC (Weighted Average Cost of Capital)- WACC is the weighted average cost of capital: the blended rate of equity and…
EBITDA- EBITDA is earnings before interest, taxes, depreciation, and amortization: the cash-flow proxy on which…

Paired valuation method

/en/waarderingsmethodes/dcf

Definition

Worked example

When it matters

Frequently asked

When is DCF better than an EBITDA multiple?

For growth businesses where current EBITDA doesn't reflect future cash flow, for businesses with upcoming capex that depresses short-term EBITDA, and when sector multiples are missing (rare specialist sectors). In classic SME transfers the EBITDA multiple remains first choice.

How sensitive is DCF to assumptions?

Very sensitive. A 1% shift in WACC or terminal growth rate can move value by 25-40%. Always provide a sensitivity analysis: e.g. DCF value at WACC 9% / 10% / 11% and terminal growth 1% / 2% / 3%.

Which cash flow should I use?

Free Cash Flow to Firm (FCFF): EBITDA − taxes − capex − Δ NWC. Not EBITDA itself: that overstates by ignoring capex and working capital. For the first 5 years use realistic business-plan figures; then a linear or tapering projection.