Valuing a Business

7. Discounted Cashflow

This method is the most technical way of valuing a business. It depends heavily upon assumptions about long-term business conditions.

7.1 It is used for cash-generating businesses which are stable and mature.

• For example, a publishing house with a large catalogue of titles, or a water company with a local monopoly.

7.2 The valuation is based on the sum of the dividends forecast for each of the next 15 years (at least), plus a residual value at the end of the period.

• The value today of each future dividend is calculated using a 'discount interest rate', which takes account of the risk and the time value of money (£1 received today is worth more than £1 received tomorrow).

7.3 If a business can inspire confidence in its long-term prospects, then this method underlines the business' solid credentials.