What is a business worth?
Valuation estimates what your business is worth — useful if you sell, take a partner, or seek investment. One common way is discounted cash flow (DCF): a business is worth the future cash it will produce, brought back to today's value.
The idea
Estimate the cash your business throws off each year, expect it to grow a little, discount future years, and add a 'terminal value' for everything beyond year five. The sum is a rough value.
Honesty first
Valuation is a range, not a price. Small changes in growth or discount assumptions swing the answer a lot. Use it to negotiate, not as gospel.
Offered 4,000 for her established grocery stall, a widow counted its worth three ways: her stock and fittings (2,200), what similar stalls had sold for (3,500), and five years of its cash flows (about 5,100). Seeing the offer sat below every method, she declined — and sold two years later for 5,500.
A young man overpaid for a barbershop priced on its best month ever. The seller's records covered only that month; the yearly average was barely half. He recovered slowly by rebuilding the client list, but now tells everyone his rule: value a business on its ordinary months, and ask for a full year of records or walk away.
Practice
In DCF, a business is worth...
The future cash it produces, discounted back to today's value.
Why treat valuation as a range?
Because small changes in growth or discount assumptions move the answer a lot.
Open the Business Valuation (DCF) tool. Enter 500 free cash flow, 5% growth, then raise the discount rate. What happens to the value?
A higher discount rate lowers the estimated value, because future cash is worth less today — small changes move the range a lot.
Estimate your own yearly free cash flow — profit left after all costs and your own pay — and write it down.
This single figure drives any valuation. If you don't know it, that's the first number to start tracking.
