This post was written by Capstone Managing Director John Dearing:
A client recently asked us to help with VALUATION on a deal they had in their pipeline. It started off innocently enough. Walking through Discounted Cash Flow (DCF) basics, adjusting the model to make it more user friendly, and adding terminal value to their model.
They were wondering about how to forecast appropriately so we talked through the importance of utilizing a base case, integrating in an assumptions page, adding scenarios, and how to best leverage the data provided by the seller during due diligence. We ended up providing them with a simple tool to “get close” (and in this case, get comfortable) when you have limited information.
Then, it got more in-depth. What is WACC (Weighted Average Cost of Capital) and how do we use it? What discount rate should we use for the DCF and Present Value (PV) calculations? We addressed these core questions and many more but it made me realize yet again that while valuation has always been described as “art”, not “science”, the more you can set up as “standards” or, in our vernacular, “tools”, at the beginning of the process, the more likely you are to maintain momentum with owners and know where your true value drivers and flex points are when you enter into negotiations.
Photo taken by 401(K) 2012