Skip to main content

Discounted Cash Flow (DCF)

A valuation method that estimates the present value of a company's expected future cash flows by discounting them back to today using a discount rate.

What DCF Measures​

Discounted cash flow asks a single question: what is a stream of future cash worth in today's dollars? A dollar earned five years from now is worth less than a dollar earned today, both because of inflation and because future earnings are uncertain. DCF applies a discount rate to each future year of projected cash flow, then sums those discounted amounts into one present value. Warrillow defines it plainly in his vocabulary:

"DCF (Discounted Cash Flow): Valuation estimating the present value of future cash flows using a discount rate."

Warrillow, The Art of Selling Your Business, ch. 12

The higher the discount rate, the lower the present value, because a higher rate reflects more perceived risk in collecting that future cash. A business with steady, predictable earnings can be discounted at a lower rate and is therefore worth more under DCF than an erratic one.

One of Three Valuation Lenses​

In chapter 12, "What's Your Number?", Warrillow treats DCF as one of three ways to estimate what a business is worth, alongside an asset-based approach and comparables (recent sales of similar companies). No single method gives the answer. Each illuminates a different facet of value, and a seller benefits from running all three before deciding what the business is worth.

DCF is the most forward-looking of the three. Asset-based valuation looks at what the company owns today, and comparables look at what similar companies sold for in the past. DCF instead projects forward, which is why it sits closest to what an acquirer is actually buying: the right to the company's future cash, not its history.

Worth vs. Worth to You​

Warrillow draws a sharp line between what a business is worth and what it is worth to you. DCF, assets, and comparables together produce a market value, an estimate of what a rational buyer would pay. That figure is separate from the personal value the owner places on the business and on the life that selling would unlock.

"What's your business worth vs. worth to you: Market value (assets/DCF/comparables) is separate from personal value; compare the two to know whether to sell."

Warrillow, The Art of Selling Your Business, ch. 12

A DCF figure is therefore a tool for the seller's own clarity, not a number to broadcast. Warrillow's broader counsel in the same chapter is to never reveal your number first, because naming a price caps it and sends the buyer hunting for less. DCF helps you know your floor and ceiling privately so you can hold your position when offers come in.

Limits in Practice​

Most small and mid-sized private businesses are not priced primarily on a formal DCF. They trade on a multiple of earnings (EBITDA or, below roughly $1 million, SDE), which is itself a shorthand for discounted future cash flow. DCF is sensitive to its inputs: small changes in the growth assumption or the discount rate swing the output widely, and a buyer can always argue for more conservative figures. For the seller, DCF is most useful as a sanity check against the multiple-based number and the comparables, not as the headline on which a deal is struck.

Further Reading​

Sources: Warrillow, The Art of Selling Your Business ch.12.