Using a DCF valuation approach to value a business is common but also open to pitfalls.
While the technique itself is straightforward, here are some things to watch out for whether you’re– a business leader relying on the valuation to make a go / no-go or a negotiation decision or– the preparer of these valuations and carry the responsibility of helping the business owner make the right decision
Here are some common issues and some best practices to avoid them.
The base case should reflect assumptions that are realistic and achievable.
The P&L owner (who is responsible for running the business post-close) should provide the business assumptions
The presentation of the analysis should spotlight the uncertainty inherent in valuations
The value of the business after the projection period should be generated using a sustainable growth year