A DCF builds a forecast of free cash flows (EBIT after tax, plus D&A, minus capex and working capital changes) over a 5–10 year period, then discounts each year's cash flow back to today using the WACC — weighted average cost of capital. The bulk of value in most SME DCFs sits in the terminal value: the lump-sum estimate of all cash flows beyond the forecast horizon.
DCF is theoretically rigorous but highly sensitive to assumptions. A 1% change in WACC or terminal growth rate can move enterprise value by 15–25% in a typical mid-market business. This makes DCF both the most defensible methodology (when assumptions are grounded) and the most manipulable (when assumptions are optimistic). Buyers and sellers often use DCF as a sanity check against market multiples rather than as a standalone price.
For SME transactions in France and Switzerland, DCF tends to work best for businesses with stable, recurring revenues and predictable capex — subscription software, long-term service contracts, regulated utilities. For businesses with lumpy revenues or high customer concentration, market multiples anchored to Argos Index data typically carry more weight with buyers.
Worked example
A business generates €2m of free cash flow growing at 5%/year. WACC: 12%. Terminal growth rate: 3%. 5-year DCF value: €20.1m enterprise value (using Gordon Growth terminal value). At the same time, 9× trailing EBITDA of €2.5m implies €22.5m. Both outputs inform the negotiating range; the spread between them defines the valuation debate.
Frequently asked questions
Why is DCF often different from the multiple-based valuation?
DCF values a specific set of cash flow forecasts at a specific discount rate — both of which can be argued. Multiple-based valuation anchors to what buyers have actually paid for comparable businesses in the market. Both are valid; the difference between them reveals where the assumptions diverge and where negotiation will focus.
What WACC is appropriate for a French or Swiss SME?
For unlisted mid-market SMEs in France and Switzerland, WACCs typically range from 10% to 15%, depending on sector risk, leverage, and size. A defensive business services company with recurring contracts might use 10–11%; a more volatile consumer business might use 13–14%. The illiquidity premium for private companies adds 1–3% above listed comparable WACCs.
What is the terminal value and why does it dominate DCF?
Terminal value represents all cash flows beyond the forecast period, typically calculated as: (last-year FCF × (1 + g)) / (WACC − g). In most 5-year DCFs, the terminal value accounts for 60–80% of total enterprise value. This is why small changes in the terminal growth rate assumption have outsized impacts on valuation.