”Warren Buffett uses what’s called a discounted cashflow analysis. He looks at how much cash the business generates each year, projects it into the future and then calculates the worth of that cash flow stream “discounted” using the long-term Treasury bill interest rate”
Discounted Cash Flow is a method of business valuation that values a business according to the expected future returns, discounted for inflation and discounted for risk. It purports to value the business by arriving at the net present value of those cash flows. In other words, to know the present value of your business, all the future expected cash flow associated with cash flow are discounted so as to arrive at its value at today. Discounted cash flow is based on time value of money because a dollar today is worth more than a dollar in a year’s time and even more than a dollar in two year’s time.
This article provides you with useful information on how to value a business. If you are planning to sell your business, you should know its’ worth and as a result also the process of valuing a business. This is part of an article, originally published in Entrepreneur magazine online.
