In the discounted cash flow method, the value of the company is determined on the basis of expected future cash flows. First, earnings before interest and taxes (EBIT) are calculated and reduced by corporate taxes (assuming a company without debt). Thereafter, non-cash income and expenses are eliminated and replaced with corresponding income and expenses. Instead of depreciation and amortization, capital expenditures (CAPEX), for example, are applied. In addition, changes in net current assets that do not affect income must also be applied. Your business plan is updated on the basis of the input for the next three years, taking into account an industry-specific EBITDA margin.
Derivation of free cash flows
In order to take into account the higher risk associated with a startup compared to an established company as well as the significantly higher planning uncertainty, a risk discount is applied to the projected future cash flows. The so-called survival probabilities applied for this purpose are based on empirically determined data and reflect the probability with which an early-stage company (depending on age) will still be active in future periods. In principle, the younger a company, the higher its statistical default risk or the lower its survival probability and thus the higher the discount to be applied to future cash flows.
For value derivation, the free cash flows are discounted to today's level using an industry-specific capitalization interest rate. To arrive at the market value of the company's equity, the company's so-called ""net debt"" is then deducted (queried in the tool under ""interest-bearing liabilities less cash"").
The two DCF methods differ with regard to the valuation procedure in perpetuity. While the ""DCF method with LTG"" (LTG stands for ""Long Term Growth"") determines the terminal value according to the Gordon Growth Model with a long-term growth rate, the ""DCF method with multiples"" determines the terminal value using a sales multiple.