THE BARATELLI INSTITUTE · Mentoring at Scale
FOR FOUNDERS, CFOS, BOARD MEMBERS RECEIVING A BANKER'S DCF, AND ANYONE WHO WANTS TO STRESS-TEST A VALUATION

The DCF your banker is using. Stress-test their inputs before you accept their number.

A DCF is just three assumption blocks: revenue growth, margins, and discount rate. Move any one of them by 200 bps and the valuation moves 30%. Move two and you can swing 50-70%. This tool walks the standard explicit-forecast + Gordon-growth-terminal model, runs a sensitivity tornado, and surfaces which assumption is doing the most work in your banker's number.

5-yr
Explicit forecast
TV
Gordon growth terminal
±200bp
Sensitivity tornado
3
Scenarios (bear/base/bull)
YOUR DCF
1
Starting point
2
Revenue & margins
3
Capex & WC
4
Terminal & WACC
5
Valuation + sensitivity
STAGE 1 OF 5

Starting point (year 0)

Defaults model a $50M revenue services business with 18% EBITDA margin — typical mid-market acquisition target.

Trailing-12-month revenue. Starting point for the 5-year forecast.
$
EBITDA / revenue. Used for year-1 forecast; you can ramp from here.
%
Total debt − cash. Subtracted from enterprise value to get equity value.
$
For per-share value calculation. For private companies, use 1 (so per-share value = total equity value).
Why DCF is the most-trusted and most-abused valuation method. It's "first principles" — a company is worth the present value of its future free cash flows. But the inputs are assumptions, and small assumption changes drive huge valuation differences. A banker can defensibly produce a $80M valuation OR a $130M valuation for the SAME company by tweaking growth rate, margin trajectory, terminal growth, or WACC by 100-200 bps each. The discipline isn't to find "the" answer — it's to know which assumptions are doing the most work in the answer.
STAGE 2 OF 5

Revenue growth & margin trajectory

5-year explicit forecast. Linear ramps from year 1 to year 5 keep this simple; production DCFs would model more granularly.

Near-term growth. Often higher than terminal — most companies deliver above-market growth in years 1-3 then converge to GDP.
%
Mature-state growth heading into terminal. Should converge toward long-run nominal GDP (~4-5%) by year 5 for most businesses.
%
Mature margin assumption. Operating leverage assumption: most companies see 50-200 bps of margin expansion as they scale, then plateau. Margin compression on the table for commoditizing businesses.
%
Cash tax rate on EBITDA below D&A. Federal C-corp 21% + state 4-9% blended. Most US C-corps: 25-27%.
%
The margin-expansion assumption that gets banker DCFs in trouble. Forecasts with year-1 margin = 15% and year-5 margin = 25% are common in banker pitches. The implication is 1,000 bps of margin expansion over 5 years — historically, this happens at maybe 5% of public companies. For most businesses, margins are sticky. If a banker's DCF assumes meaningful margin expansion you don't have a clear plan for, push back hard. "What specifically drives that margin uplift?" is the killer question.
STAGE 3 OF 5

Capex & working capital

FCF = EBITDA × (1−tax) − Capex − ΔWC. Capex and ΔWC are both real cash drains that reduce DCF value.

Total capital expenditure. For services / software: 2-5% of revenue. For manufacturing / industrial: 5-10%. For utilities / heavy industry: 10-20%+. Should equal D&A in steady state for a stable business.
%
Depreciation + amortization. Roughly equals capex in steady state. Use 80-100% of capex for most mature businesses; lower for high-growth where capex outpaces D&A.
%
Net working capital (AR + Inventory + Prepaid − AP − Accrued) / revenue. Services: 5-15%. Distribution / wholesale: 15-30%. Manufacturing: 20-35%. As revenue grows, WC grows proportionally — that's the cash drain.
%
SBC is non-cash but DOES dilute shareholders. Best practice: deduct from FCF (it's effectively a real cost). Tech/SaaS: 5-15%. Mature non-tech: 0-2%. The "EBITDA before SBC" trick that tech companies pull is misleading.
%
STAGE 4 OF 5

Terminal value & WACC

Terminal value typically represents 50-80% of total DCF value. The terminal growth rate and WACC are the two most-leveraged DCF inputs.

Discount rate. Use the WACC Calculator for a defensible number. Most US public companies: 7-12%. Higher-risk: 12-18%. Critical: WACC moves valuation roughly 6-10% per 100 bps.
%
Perpetual growth past year 5. SHOULD be at or below long-run nominal GDP (~4-5%). Higher than that implies the company eventually exceeds the entire economy. Most defensible terminal growth: 2.5-3.5% (long-run inflation + small real growth).
%
Gordon growth: TV = FCF_y6 / (WACC − g). Exit multiple: TV = EBITDA_y5 × multiple. Most rigorous DCFs cross-check both. Tool defaults to Gordon growth.
Year-5 EBITDA × this multiple = terminal value. Use industry median; 8-12x for industrial / services, 12-18x for SaaS, 6-10x for retail.
The terminal-value-as-% gotcha. In most DCFs, terminal value represents 60-80% of total enterprise value. That means the terminal growth rate and WACC drive most of the valuation answer. A 1pp change in either typically swings valuation 15-25%. Bankers know this and pick assumptions that defend the valuation they want. Your sanity check: when you receive a DCF, run it at YOUR terminal growth (e.g., 2.5% — long-run real GDP) and YOUR WACC and see how the answer changes. The gap is the assumption disagreement.
STAGE 5 OF 5 · VALUATION

DCF valuation

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5-year explicit forecast

$M
Y1
Y2
Y3
Y4
Y5
Y6 (TV)

Sensitivity tornado (200 bps swings)

Valuation metrics

Recommendations

PAIRS WITH
WACC Calculator · Deal Multiples · Asset vs. Stock Sale · §382 NOL
The WACC Calculator gives you a defensible discount rate input (don\'t accept a banker\'s rate without challenge). Deal Multiples cross-checks the DCF answer against precedent transactions and trading comps. Asset vs. Stock Sale and §382 NOL adjust the valuation for after-tax economics in actual transactions. Subscribe to the library →
LIQUIDITY EVENT PLAYBOOK

Receiving a banker's pitch? Stress-test their DCF before you negotiate.

Sell-side DCF interpretation · how to challenge a banker's assumptions without breaking the relationship · the M&A-vs-financial-buyer valuation discount · structuring deal-protection at the agreed price · the post-LOI pricing-renegotiation playbook.

DCF is a model, not the truth. The output is sensitive to assumptions and shouldn't be the sole basis for any major decision. Cross-check with: trading comps (current public peer EV/EBITDA, EV/Sales), precedent transactions (recent M&A deals at known multiples), and asset-based valuation for asset-heavy businesses. The model uses simplified two-stage DCF (5-yr explicit + Gordon growth terminal); production DCFs may use 10-year explicit forecasts, three-stage models with intermediate growth, or H-model variants. Does not separately model: NOLs (use the §382 NOL tool), changes in capital structure over time, deferred-tax adjustments, lease-accounting nuances, or acquisition-related synergies. This is not investment, accounting, or M&A valuation advice.
WANT THE METHODOLOGY BEHIND THIS TOOL?
This calculator is one chapter of Private Equity Reference Guide.
The tool gives you the answer. The guide gives you the argument — the case law, the worked examples, the negotiation playbook, the cross-check tables, the exception cases. Read the chapter and you can defend your number to a board, a buyer, an examiner, or a counterparty.
The methodology behind this calculator is in Ch 18 Valuation Methodology of the reference guide.
See the Guide → Browse all 22 guides
PROFESSIONAL DISCLAIMER · PLEASE READ

Educational and informational purposes only. This calculator and any output it produces are intended solely for general educational and decision-support purposes. They do not constitute investment, tax, legal, accounting, appraisal, lending, insurance, or any other professional advice, and they do not create a fiduciary, attorney-client, accountant-client, or advisor-client relationship of any kind.

Estimates based on your inputs. All results are estimates derived from the data and assumptions you provide. Tax law, accounting standards, regulations, market conditions, and the specific facts of your situation can materially change the answer. The Baratelli Institute, its affiliates, and any co-branding professional make no warranty of accuracy, completeness, currency, or fitness for any particular purpose, and disclaim all liability for decisions made in reliance on the output.

Consult your own qualified professionals. Before acting on anything calculated here, consult your own attorney, CPA, financial advisor, appraiser, lender, or other qualified professional licensed in your jurisdiction who has reviewed your specific facts and applicable current law. The Baratelli Institute is a publisher of practitioner reference material. It is not a registered investment adviser, broker-dealer, law firm, accounting firm, appraisal firm, or lender.

Co-branded versions: If a professional advisor's name and contact information appear on this tool, that advisor has elected to make the tool available to clients as a courtesy. Inclusion of an advisor's name does not constitute the advisor's endorsement of any specific result, nor does it transfer professional responsibility for the underlying methodology to that advisor. The disclaimer above applies regardless of co-branding.