Of all the business valuation methods under the income approach the discounted cash flow technique truly stands out. What makes this method unique?
Its solid financial foundation, flexibility in valuing established companies and startups, businesses with steady earnings and rapidly changing profits make this method an excellent choice for appraising all types of businesses.
Earnings and risk define business value
Best of all, the discounted cash flow method lets you focus on the unique value-creating attributes of each business and show clearly the key relationship among these fundamentals:
- Business value
- Business earnings prospects
- Business risk
How business value depends on your assumptions: what-if valuation scenarios
You can create business earnings forecasts of arbitrary length, usually measured in years. Each forecast is your vision of a possible business outcome. And each outcome is associated with a certain level of business risk, captured by the discount rate. The discounted cash flow method lets you determine the business value in present day dollars for each earnings and risk scenario.
To increase the accuracy of your business valuation, consider using a number of such scenarios. For example, construct earnings forecasts and assess company risk for:
- Base case, or most likely outcome you expect going foreward.
- Best case, when the business conditions are most favorable.
- Worst case, in case the business encounters unexpected difficulties.
You can then calculate business value as a weighted average of the valuation results you get for each scenario. The weights represent the probabilities, in your judgment, of each scenario actually occurring.
Discounted cash flow valuation as a decision making tool
The power of the discounted cash flow method is that it enables you to translate expected business performance into value. This creates a number of opportunities:
- Selecting the best financial and operational plan from a number of candidates.
- Defining contingency plans.
- Verifying and refining assumptions to see how the value of the business is impacted.
- Selecting the best business investment opportunity from a number of alternatives.
In this sense, you can use the discounted cash flow method as a powerful planning tool as well as a highly effective business valuation technique.
Business Valuation by Discounting its Cash Flow
This is no idle question – with cyber attacks on the rise the safety and security of your business computer has never been more important.
If you are a professional advisor, the last thing you need is to experience a computer crash in the middle of a time-critical project or sustain a loss of sensitive client data.
As a business owner, you may be running a number of applications on your computer. If your system is compromised or taken over by online criminals, the loss to your business could be devastating.
So how do you make sure this does not happen to you?
Your business software safeguard – digital code signing
The good news is that the reputable business software vendors already take serious steps to protect you. One of the most important defenses in their arsenal is digital code signing of the software products.
How software code signing works
If you are installing a software application on a Windows computer, the Authenticode technology is your first line of defense. Before installation is allowed to go on, the Authenticode on your computer performs two critical checks:
- It verifies the identity of the software publisher. For example, in the case of ValuAdder, your computer informs you that the publisher is Haleo Corporation (that’s us!).
- It verifies the product itself. Continuing with the above example, you are notified that ValuAdder 5 is the software product you are about to install.
Only after the above checks have been successfully done are you advised to proceed with the software installation.
What happens behind the scenes during this critical step is really important:
First, Authenticode reads the encrypted signature included in your software product. Only the software publishers whose identity has been verified, domicile established, and corporate officers contacted can have the seal, known as the code signing certificate. This seal is required to produce the software signature for verification on your computer.
Since online crooks want to conceal their identity in order to avoid punishment, they will not have access to a code signing certificate such as one granted by VeriSign.
In addition, your computer checks that the software file is intact and has not been tampered with. You can then proceed with the product installation safely.
ValuAdder products – designed with your protection in mind
All ValuAdder business valuation software products are digitally signed by a VeriSign certificate. This authoritative third party endorsement is your assurance that your ValuAdder products will perform their functions while protecting your computer system.
Tools for Company Valuation