Discounted cash flow (DCF) estimates what a business or investment is worth today based on the cash it is expected to generate in the future. It helps buyers and owners assess whether an asking price is supported by the company’s financial prospects.
For a Swiss SME, this means looking beyond last year’s profit. Future customer demand, investment needs, and financing risks all influence value. Here is how the method works and how to interpret its results.
What Is Discounted Cash Flow?
Discounted cash flow converts estimated future cash flows into a present value. It combines forecasts of cash generation with a discount rate that reflects the return investors require.
For a better practical understanding, check out Fiduciaire Vaudavoise’s guide to forecasting cash flows.
Why Future Cash Flows Are Worth Less Today
Receiving CHF 100,000 today is generally more valuable than receiving it five years later. You can invest today’s money immediately, while a future payment involves waiting and uncertainty.
Discounting accounts for these factors. A higher discount rate produces a lower present value when the forecast cash flows stay unchanged.
How DCF Differs From Profit-Based Valuation
DCF focuses on free cash flow, which accounts for the investment needed to support the business.
Accounting profit alone does not show this. A manufacturer may report healthy earnings while spending heavily on machinery and inventory. Those cash requirements affect its valuation, even when they do not reduce accounting profit by the same amount immediately.
How Do You Calculate Discounted Cash Flow?
For this guide, we use free cash flow to the firm: cash available to debt and equity providers after operating costs, operating taxes, and reinvestment.
Step 1: Forecast Free Cash Flow
Build a forecast, often covering five years. Extend it if the business needs longer to reach a stable operating position.
Estimate revenue, costs, taxes, equipment spending, and working capital needs.
Simplified formula
Free cash flow to the firm = EBIT × (1 − Tax rate) + Depreciation and amortisation − Capital expenditure − Increase in net working capital
Working capital includes items such as customer receivables, inventory, and supplier payables. If growth requires more cash tied up in inventory or unpaid invoices, free cash flow falls.
Step 2: Choose an Appropriate Discount Rate
Free cash flow to the firm is typically discounted using the weighted average cost of capital (WACC). This combines the required return on equity with the cost of debt, taking account of the relevant debt tax effect.
A bank lending rate alone is insufficient because shareholders also require a return.
Match the discount rate to the cash flows’ currency, risk, and inflation assumptions. For example, nominal CHF forecasts require a consistent nominal CHF discount rate.
Step 3: Estimate Terminal Value
Terminal value represents cash generation beyond the detailed forecast.
Here, g is the sustainable long-term growth rate. It must remain below WACC, and the forecast must include enough reinvestment to support that growth.
The perpetual growth method:
Terminal value = Final forecast year’s free cash flow × (1 + g) ÷ (WACC − g)
Step 4: Discount the Cash Flows and Calculate Equity Value
Discount each forecast cash flow and the terminal value:
Present value = Future cash flow ÷ (1 + WACC)ⁿ
Here, n is the number of years until receipt.
Adding these present values gives enterprise value. A simplified shareholder value calculation is:
Equity value = Enterprise value − Debt + Excess cash
Other non-operating assets or debt-like obligations may require adjustments. The IFRS framework for fair value measurement provides further context on valuation techniques; it does not mean every Swiss SME transaction valuation must follow IFRS.
A Discounted Cash Flow Example for a Swiss SME
Consider an established service business with these hypothetical assumptions:
Input
Assumption
Annual free cash flow in years 1–5
CHF 200,000
WACC
10%
Long-term growth after year 5
1%
Debt
CHF 300,000
Excess cash
CHF 100,000
Annual free cash flow in years 1–5
AssumptionCHF 200,000
WACC
Assumption10%
Long-term growth after year 5
Assumption1%
Debt
AssumptionCHF 300,000
Excess cash
AssumptionCHF 100,000
A discounted cash flow for an established service business
Assuming year-end cash flows, the calculation produces:
Valuation component
Approximate value
Present value of years 1–5 cash flows
CHF 758,157
Terminal value at the end of year 5
CHF 2,244,444
Present value of terminal value
CHF 1,393,623
Enterprise value
CHF 2,151,780
Less debt, plus excess cash
(CHF 200,000)
Equity value
CHF 1,951,780
Present value of years 1–5 cash flows
Approximate valueCHF 758,157
Terminal value at the end of year 5
Approximate valueCHF 2,244,444
Present value of terminal value
Approximate valueCHF 1,393,623
Enterprise value
Approximate valueCHF 2,151,780
Less debt, plus excess cash
Approximate value(CHF 200,000)
Equity value
Approximate valueCHF 1,951,780
The produce of calculation
Terminal value is discounted because it is measured at the end of year five, rather than today.
The estimated equity value is therefore about CHF 1.95 million. These assumptions are illustrative, not Swiss market benchmarks. The result depends on achieving the forecast and does not guarantee a selling price.
When Is Discounted Cash Flow Useful in Switzerland?
DCF is most useful when forecasts can be supported by evidence such as contracts, customer history, and realistic operating budgets.
Buying, Selling, or Transferring a Business
A discounted cash flow valuation helps buyers test whether future cash generation supports the asking price. Owners can also use it when preparing a sale or succession.
Separate the business’s standalone value from benefits available to a particular buyer. For example, a buyer that can reduce overlapping costs may see additional value.
Assessing Investments Across Different Industries
The most important forecast inputs vary by business:
Business type
Key assumptions to examine
Professional services
Client retention, billable capacity, and owner dependence
Manufacturing
Equipment replacement, production capacity, and inventory
Retail and hospitality
Seasonality, premises costs, and refurbishment
Subscription software
Customer churn, recurring revenue, and development spending
Professional services
Key assumptions to examineClient retention, billable capacity, and owner dependence
Manufacturing
Key assumptions to examineEquipment replacement, production capacity, and inventory
Retail and hospitality
Key assumptions to examineSeasonality, premises costs, and refurbishment
Subscription software
Key assumptions to examineCustomer churn, recurring revenue, and development spending
Investments across different industries
For an individual project, compare discounted future cash flows with the initial investment. The resulting net present value (NPV) indicates whether the project is expected to exceed the required return.
Which Swiss Factors Affect a DCF Valuation?
Local assumptions matter because the same operating forecast can produce different values under different tax, currency, and ownership circumstances.
1. Taxes, Currency, and Financing Assumptions
Reflect the company’s applicable tax circumstances rather than using one rate for all Swiss businesses.
For exporters, model how exchange rates affect both revenue and costs. CHF cash flows must be discounted using a rate consistent with CHF assumptions.
For a valuation dated in 2027, update market inputs to that date. A previous valuation’s discount rate should not be carried forward without review.
2. Owner Dependence and Forecast Reliability
A business may rely on its owner for sales, relationships, or technical work. Consider what happens after that person leaves and whether replacement staff will be needed.
Review owner remuneration, related-party charges, and postponed equipment spending. Adjust forecasts where necessary, while avoiding counting the same risk twice through both reduced cash flows and an added discount-rate premium.
What Are the Advantages and Limitations of DCF?
DCF makes the reasoning behind a valuation visible, but its precision depends on the assumptions.
A Valuation Based on Future Business Performance
The method connects value to expected cash generation and makes growth, costs, and investment needs explicit.
This is useful for private businesses where comparable transaction data may be limited. Owners can also see which operational improvements could support a higher valuation.
Small Changes Can Have a Large Effect on Value
Terminal value often accounts for a substantial share of the result. In the example above, it represents roughly 65% of enterprise value.
Test different discount rates, growth rates, and operating scenarios rather than relying on one figure. Early-stage businesses with uncertain forecasts may require a particularly wide valuation range.
Cross-check the result against relevant market multiples or asset-based methods. Large differences deserve investigation.
Get Support With Your Swiss Business Valuation
Preparing for a transaction? Discuss your business valuation with Fiduciaire Vaudoise to identify the information needed and the assumptions that will influence the result.
