How to Value a Business using a Discounted Cash Flow Excel Template

1. How to Value a Business using a Discounted Cash Flow Excel Template Having your own business requires significant effort, research and considerations, and in most cases a lot of money as well. At some point, especially when it comes to buying or selling a company, the question will come up what is the value of a business? Very often business owners have not really thought about it and will need to spend some time to get up to speed with modern valuation techniques. For many of them performing a business valuation will open up a new perspective how to look at their company as a business valuation has to strictly focus on the financial perspective. In this article we are going to explain how Discounted Cash Flow Analysis works and how using a Discounted Cash Flow Excel Template can greatly improve your financial decision-making. What is Discounted Cash Flow Analysis? One of the most commonly used valuation techniques is the Discounted Cash Flow (DCF) Analysis which uses forward looking Free Cash Flow Projections to estimate the value of any business. DCF Analysis is a forward-looking valuation technique using the income approach. As a concept this is one of the most meaningful valuation techniques as the value of a business should correspond to the discounted net present value of its future cash flows. This normally requires a comprehensive 5-year financial plan with a calculation of the Free Cash Flows as well. Today, the business valuation technique is not only used by bankers anymore but also by management and business owners. Let us look at the following example: For simplicity purposes, assume that you need to value a business which is projected to generate first $1 million and after 3 years $5 million in Free Cash Flows per year. Cash Flows will grow at 10% in year 4 and 5.For years thereafter, the growth rate will be 2% only. The discount rate is at 10%. The Free Cash Flow Forecast might look like this: Year 1: + $1.0 million in Free Cash Flows Year 2: + $1.0 million in Free Cash Flows Year 3: + $5.0 million in Free Cash Flows Year 4: + $5.5 million in Free Cash Flows Year 5: + $6.01 million in Free Cash Flows Other Years: + $6.2million in Free Cash Flows growing at 2% per year Now, we cannot simply add up all these cash flows since cash flows in the distant future are less valuable than cash flows you can receive tomorrow. For this we need to discount the cash flows and now our analysis looks like this: eFinancial Models Zurich, Switzerland 8000 info@efinancialmodels.com https://www.efinancialmodels.com/

2. How to Value a Business using a Discounted Cash Flow Excel Template The discounted cash flow analysis determines the Net Present Value (NPV). The NPV equals the sum of the discounted Free Cash Flows including the Terminal Value. In above example the business now is valued at $60.9 million based on the stated assumptions. As you can see, discounted cash flow analysis is not as straightforward anymore. It requires to use several assumptions and also the valuation methodology needs to be correctly applied. Why using a Discounted Cash Flow Excel Template? As you can see in the example above, Discounted Cash Flow Analysis can be a bit trickier than it is presented in text books. For this reason, a good way for many business people is to use a Discounted Cash Flow Excel Template. Good Excel spreadsheet model templates have the following characteristics: Detailed calculation framework for yearly Free Cash Flow Calculation Industry-specific model as every industry will have different drivers for revenues, costs and investments in order to calculate the Free Cash Flows Calculation of the Net Present Value (NPV) Focuses the reader’s attention on the required assumptions Allows to edit and customize the model as needed eFinancial Models Zurich, Switzerland 8000 info@efinancialmodels.com https://www.efinancialmodels.com/

3. How to Value a Business using a Discounted Cash Flow Excel Template Allows for time savings as the model structure is built and the focus of the work can lie on validating assumptions and fine-tuning the model rather to build it from scratch In reality, valuing a business via the DCF method is a process not a mechanical task and it requires several iterations until the model is fully fine-tuned. The use of Discounted Cash Flow Excel Template can be very helpful as not every detail will have to think of and the attention can focus on the really important matters. By using a financial model template, the valuation exercise normally can be performed faster and at better quality than developing a model from scratch. Financial decision-making can be greatly improved this way. eFinancial Models Zurich, Switzerland 8000 info@efinancialmodels.com https://www.efinancialmodels.com/