GLOSSARY
Discounted Cash Flow (DCF)
A valuation method that estimates a business's value by calculating the present value of its projected future cash flows, adjusted for risk and the time value of money.
Definition
The discounted cash flow (DCF) method projects the business’s future revenues over 5 to 10 years, then “discounts” them — bringing them back to today’s value, reflecting the fact that a dollar tomorrow is worth less than a dollar today.
In French-language Quebec documentation, you’ll see DCF (flux de trésorerie actualisés) used for the same concept.
Why DCF matters in a sale
DCF is the most theoretically rigorous valuation method. It’s commonly used for growth businesses or for SMEs with atypical cash flows where industry multiples don’t apply cleanly.
How it works (simplified)
- Project free cash flows over 5 to 10 years
- Estimate the terminal value (the business’s value after the projection period)
- Discount everything at a rate that reflects risk (the discount rate)
- Add it all up to get the enterprise value
Limitations
- Projections are assumptions — small changes in inputs produce very different results
- The choice of discount rate is subjective and heavily influences the outcome
- Less intuitive than a multiple when it comes to negotiation
What every seller should know
- DCF is often used alongside multiples, not instead of them — the two methods validate each other
- If your business is growing fast, DCF can justify a higher value than historical multiples would suggest
- A professional valuator (CBV) will typically use several methods and present a range