DCF Valuation for M&A Due Diligence

Build discounted cash flow models for target company valuation in M&A contexts.

Unit System (Critical)

Storage: Absolute dollars (raw financial data)
Calculation: Millions (DCF models expect this)
Display: Smart formatting (B/M/K based on magnitude)
Never pass raw stored values directly into DCF calculations without unit conversion

Validation Before Calculation

Verify base revenue exists and is non-zero
Confirm WACC is between 5-25% (flag outliers with explanation)
Terminal growth must be less than WACC (Gordon Growth Model constraint)
Projection period: 5-10 years (default 5)
Verify EBITDA margins are within plausible industry range

Default Assumptions

Parameter	Default	Rationale
Tax rate	21% (US) / 17% (SG)	Adjust per jurisdiction
CapEx as % of revenue	5%	Adjust per industry (SaaS ~3%, manufacturing ~8-12%)
Terminal growth	2.5%	Should not exceed long-term GDP growth
WACC	CAPM-calculated	Fallback: 10-12% for mid-market
Depreciation	% of CapEx	Match to industry capital intensity
Working capital change	% of revenue delta	Use historical average if available

WACC Calculation (CAPM)

Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 - Tax Rate))

Risk-free rate: 10-year Treasury yield
Equity risk premium: 5-7% (Damodaran)
Beta: Use comparable public companies, unlever/relever for target capital structure
Size premium: Add 2-4% for small/mid-market targets

Projection Methodology

Revenue: Start from last reported, apply growth rates (declining toward terminal)
EBITDA: Apply margin assumptions (converge toward industry median)
Free Cash Flow: EBITDA - Taxes - CapEx - Change in Working Capital
Terminal Value: Gordon Growth Model or Exit Multiple method
Discount: Apply WACC to each year's FCF + terminal value

Terminal Value

Prefer Exit Multiple method for M&A (matches how buyers think): - Apply EV/EBITDA multiple to terminal year EBITDA - Cross-check with Gordon Growth implied multiple - Flag if implied perpetuity growth exceeds 3%

Required Output

Always present: - Enterprise Value range (low / base / high) - Equity Value (EV - net debt) - Implied EV/EBITDA multiple (sanity check against comparables) - Sensitivity table: WACC (rows) vs Terminal Growth or Exit Multiple (columns) - Football field chart if multiple valuation methods available

M&A-Specific Considerations

Apply a control premium (20-40%) if valuing for acquisition vs. minority stake
Consider synergy value separately from standalone DCF
Discount rate should reflect buyer's cost of capital, not target's
Model integration costs as a deduction from synergy value
Present with-synergies and without-synergies valuations separately

olo-dcf-valuation

Installation