Discounted Cash Flow Model | Quickly Value a Business

[@mrb6309]

I took a full year of Finance and my college professor never, ever, even attempted to do this. I was so motivated to learn Finance and he stripped me of the joy I felt for the subject. Thanks to you, I have regained it. THANK YOU!

[@eric_andrews]

My pleasure!!! Hopefully my channel with be helpful and fun for you as well, appreciate the comments!!!

[@hpottstock]

Thank you for this great tutorial Eric! running the sensitivity analysis makes so much sense.

[@PLxFTW]

This is definitely the fastest and clearest explanation

[@Dangermouse2256]

Many thanks for posting Eric. I have come here just to learn about DCF. Really appreciate the posting. Will just need to watch a few times

[@eric_andrews]

Glad it was helpful dangermouse. Feel free to watch a few different times and if you want to dive deeper into financial modeling I've got some other great lessons. One of my favorites is the 3 statement financial model: kzbin.info/www/bejne/rp27dY2vj56UsM0

[@jamesnguyen2911]

amazing video. Plus that final What-if is an eye opener

[@eric_andrews]

Haha I'm glad you liked that last part, I couldn't resist adding it

[@Juanracastel]

Even more surprise, you are indeed one if a kind !!!! excellent teacher and modeler !!!! Oil and Gas financials, Civil engineer with a mayor in finance and Urbanism

[@eric_andrews]

Thanks JR! I'm so glad this video was valuable for you in your career. Cheers

[@renattomejia3619]

taught me more than my professor in 13 min than my professor for 3 months in my Corporate Finance Class

[@eric_andrews]

That's what I wanna hear!!!!!! 🚀 🚀 🚀

[@wllymchng]

Great use of the data table to summarize difference evaluations. Thank you for the video.

[@duncanmahood2878]

The what-if analysis tool is probably one of the most underrated excel hacks - so helpful for sensitivity analyses! Thanks Eric!

[@eric_andrews]

You're welcome!! I'm glad you thought that part of the video was helpful. It's a very powerful function for sure.

[@arashghazanfari3398]

So tricky because when you calculate Enterprise value from a market cap standpoint you add debt and subtract cash. I guess though it makes sense that market cap = equity value. Great video!

[@eric_andrews]

Yes exactly - you got it. Same exact math but you have to the calculation both ways depending on whether you start with equity or enterprise value.

[@Jupiter1423]

Better way to say it Market cap = market's opinion of equity value

[@germaniamoney942]

thanks. I work in finance and your tutorial was clear and concise

[@stevescruby1343]

Extremely useful. Thank you very much for this instruction.

[@eric_andrews]

You got it!

[@way2worldoffinance436]

Great video. Excellent, Simple and Perfect

[@Maddo_Aussie]

Great template & I love the sensitivity analysis feature!

[@yourstruly5DA]

Amazing work Eric. I saw your SaaS startup financial model as well - that was exemplary. Keep up the good work.

[@eric_andrews]

Appreciate that, will do!

[@hammoodulhasan4099]

Great Video Eric

[@kylegrabowski8473]

Great video Eric! Exactly the what companies do in a real situation. This might even come up in interviews for those looking to get into the VC or startup space ;)

[@eric_andrews]

100%!!! A great formula to understand well, and have memorized to use in the real world. Thanks for the feedback 😁

[@vishaldahiya1222]

@@eric_andrews Sir my question is who to find fcf growth of 1-3 year 4-6 year 6-10 year please sir reply Mar 2018 fcf is 7876 March 2017 fcf is 6891 Mar 16 fcf is 5961 Mar 15 fcf is 3260 Mar 14 fcf is 1450 Mar 13 fcf is 486 Mar 12 fcf is 171 Mar 11 fcf is 816 Mar 10 fcf is 1632 Mar 9 fcf is 447

[@amantyagi4158]

You are one hell of a Financial Modeller. Love your videos man!!

[@eric_andrews]

Thanks Aman - appreciate the comments dude!!

[@stefaniefigueroa6357]

thank you, this is amazing, just what I was looking for.. one of the best videos I've seen on this. you got a new subscriber!

[@eric_andrews]

Cheers Stefanie glad it helped !!

[@yusufpasha3907]

amazing video!!! it was so smooth thanks

[@rispahkariuki8052]

You are such a good teacher!Thank you!

[@thisaruwithanapathirana4885]

Thank you Eric. So helpful and very descriptive

[@eric_andrews]

Thanks for the comment Thisaru I'm glad it was helpful!

[@TheGrantharling]

Thank you for your videos - you are basically making my MBA Financial Management way easier!

[@eric_andrews]

Love to hear it! That was honestly part of my dream - to basically make a free MBA !! Cheers grant! More to come....

[@TVFeederInc]

Perfect and totally genius!

[@jacksongash2067]

Thanks Eric! Super insights. As always, concise and laconic!

[@kevinbarnes5185]

Can't be done any simpler...great job

[@amazingme1325]

Thank you for this! You made things so much easier. 😁😁

[@DavidTorres-hw1vl]

Best explanation by far

[@eric_andrews]

Cheers!

[@mariahakobyan5767]

This is very helpful, thanks a lot Eric!

[@eric_andrews]

Really glad to hear it. Thanks Maria !

[@majdsahmarany3091]

DAMNN MAN HOW BLOODY SMOOTH!! 10/10 🤘🏻🤘🏻

[@eric_andrews]

Lol you got it!!

[@sonerguney3225]

Very good. Thanks

[@jaszoohz7923]

super helpful. thank you so much!

[@prasannasiriwardhana7661]

Superb presentation!

[@eric_andrews]

So happy to hear it Prasanna! Thanks for checking it out - cheers!

[@jasminechu2197]

This is super helpful. Thank you for producing such amazing content!

[@eric_andrews]

My pleasure!

[@giuseppebv9068]

Great Video as always! However, in this video, you mention that the enterprise value doesn't take into account what's on the BS (so cash and debt) as opposite of the equity value, while in another of your videos ('Enterprise Value vs Equity Value') you said the exact opposite. Could you please clarify?

[@quanganhpham2038]

omg it's so helpful. Thanks for the amazing content.

[@gatzerbyzer]

Thank you so much! Life saver!!!

[@eric_andrews]

you got it

[@AlternativeInvestor]

I watched your 3 Statement video to and it's helping me learn a lot but how do you find the info to use for the fin. statements? Do the companies provide them? I know public companies publish them but what about smaller companies?

[@pokemasta246]

Great work!

[@nuw_1683]

Wow, this was amazing. Thank you

[@eric_andrews]

My pleasure thanks for watching !

[@monkeyDboof]

Sensitivity part came in clutch

[@eric_andrews]

Glad you liked it! Definitely pushes the analysis to the next level getting that level of insight

[@dhruvrehan]

Hi, Eric A Quick Ques: Like we have subtracted Capex for Unlevered FCF, do we need to do a similar treatment for any additions in Intangibles or only CAPEX?

[@castorwar6873]

Great Video! Thank you

[@eric_andrews]

My pleasure thanks for checking it out!

[@mjime128]

You explained very well! What if I follow step by step but I am getting a pattern for the what-if analysis? What could be wrong? I did check all formulas and they are correct. I would really appreciate it if you can assist. Thank you for taking the time to reply.

[@eric_andrews]

Hi, just download the file in the description and cross reference. Cheers

[@orjacobdolev2471]

Hey Eric quick question, can I arrive to unlevered cash flow straight from EBITDA if I just don't add up the D&A cost? I'm asking because I'm working on data where the D&A isn't stated. Thanks in advance!

[@jefffaulkner8793]

Would this be accurate for a service based company?

[@GuangzhouGateway-Hani_Saeid]

Hello Eric. Great video but i would like to know where to get the cash and debt and what these two includes .i am self studying to make the financial model and i got stuck at getting the equity value . If you can help it will be much appreciated 🙏

[@eric_andrews]

Ya totally. You would get those from the balance sheet of a company - so if you were calculating it for a real company you just need to get the most current financial statement. If you are building a future projection, check out my 3 statement financial model video and that would show you how to build all the financial statements you'd need to build a DCF model on top of.

[@tailselva8885]

Any prediction methods are there to find future EBITDA, EBIT, TAX value of the company...

[@mrb6309]

Hi Mr. Andrews - have you done an LBO model? Are you planning to? Just wondering.

[@eric_andrews]

To be completely honest I've been involved as an employee or consultant with a couple businesses that have been bought out with too much debt and it ended very poorly so I don't really like to promote buy-outs

[@hrideshkhurana4330]

Though it would be easy But this guy made it easier!

[@eric_andrews]

So happy to hear it, good luck Hridesh!

[@gerompauel]

I diidn't get anything) but your explanition is very interested!:))

[@ryanmcneil5772]

how does the EBITDA multiple effect the what if table? confused as I didn't see it effect the NPV model?

[@ryanmcneil5772]

Oh nevermind - exit value

[@AliaEbrahim-e1r]

Thank you for the video. At the beginning, why do you deduct taxes from EBIT - EBIT already has taxes not included?

[@eric_andrews]

EBIT is operating income aka pretax income. EBIT does not include taxes!

[@AliaEbrahim-e1r]

@@eric_andrews Thank you for your reply! But EBIT stands for Earnings before Interest and Taxes. Ok so you are deducting taxes because it is a cash expense? Then why did you not deduct interest charges? And if you are adding back Depreciation and Amortisation becuase its a non cash expense would it not have made sense to start off with EBITDA and then deduct the taxes, less capex, less change is NWC?

[@eric_andrews]

@user-mv4st1hb5d the general definition of EBIT is earnings before interest and taxes, that said, not every company has interest (you only have interest if you're in debt), and not every company pays taxes (unprofitable companies for example). In our example we only had taxes. And in terms of your mention of why not start with EBITDA, sure that also be correct, you could work backwards from a variety of different metrics as long as you do the math right. You will still arrive at the same cash flow number. I did a slightly longer way as I was trying to cover it from various angles so people could maximize learning, hope that helps!

[@caymanislandz]

On the what if I can only get the Discount rate to work. The Multiple is not coming through. What am i doing wrong?

[@bdraughon22]

Is the Capex credit portion paid off with the debt liabilities, and ignored in the future cash flows cash flows? Is that the logic with using unlevered free cash flow because cash flow could be greater with the proper capital structure in each period? (Learning small business valuation)

[@eric_andrews]

Hey - sure I can help. So capex just means the assets you buy, so that Capex necessary to run the business regardless of capital structure. Capex is just paid with cash from operations. The DCF model itself ignores debt and capital structure, it is just trying to figure out what the value of the core business is excluding financing, and how much cash it is kicking out. FCF is not affected in any way by the cap structure (the financing section of the cash flow comes after FCF). Making the jump from enterprise value to equity value is the step where the debt actually affects the valuation and you make adjustments based on what the balance sheet looks like. But the model itself excludes the debt. Incorporating debt would be more of a calculation you would do in an LBO model to see what the business has the capability to pay off and what the returns are for the equity holders, but that's a separate thing.

[@ntcuong01ct1]

Dear Friends, I have 1 question regarding Financial Modeling: 1/ Please tell me the difference between Scenario analysis, sensitivity analysis, stress test?, and the intended use of each?. Thank you.

[@tonypell]

Hello, I'm just wondering how you found the data to enter for the future years of 2024 through 2028? Did you make those numbers up based on the percent that they thought they would grow yoy? Please let me know when you get a chance, thanks!

[@eric_andrews]

Yes made up numbers, but in real life those would come from a more robust three statement financial model like this: kzbin.info/www/bejne/rp27dY2vj56UsM0si=yuM2RxAux3Zyr09U

[@alina37228]

Great video! In your video, you mentioned that operating profit is EBIT but operating profit doesn't include non-operating income like EBIT. Could you clarify?

[@DrexlerCano]

Does the EBITDA multiple work for mature companies as well or is it better to use PGR?

[@eric_andrews]

Hi Drexler, ya I honestly think most companies are valued more on their multiples (but not necessarily ebitda) than on a dcf model, although people still use dcf to cross reference. A lot of times people just want a few different valuations to cross-reference. I just released a video talking about multiples valuation but by type of company (early, growth, mature) and private vs. public. It would for sure be helpful for you: kzbin.info/www/bejne/pHXEXpugqb12aa8

[@DrexlerCano]

@@eric_andrews thanks for reply will check it out! Youve earned another subscriber!

[@eric_andrews]

@@DrexlerCano cheers!

[@andermurillo2868]

Hi Eric, in the final step when we add Cash and debt, shouldn't we also add Accounts receivable?

[@eric_andrews]

Hey Ander. Yes accounts receivable is generally included in "cash and cash equivalents" on a balance sheet so I think it would make sense to include in "cash". Good question

[@Editnamehere]

Great video my guy. Would unlevered cash flow be similar if not the same to “owners earnings”?

[@eric_andrews]

Hey Marcus - ya it's the same idea. You got it 👍

[@tailselva8885]

Heyy Eric, How did you forecast all future EBITDA, EBIT, TAX, value of the company, it is very confused for me.

[@eric_andrews]

Hey Tail, creating the projections is a separate process. The DCF model is just a valuation technique, and we assume that we are getting the projections from a financial model. If you want to learn about creating financial projections that include all those metrics, take a look at my video on creating a 3 statement financial model kzbin.info/www/bejne/rp27dY2vj56UsM0

[@sabhisharda1243]

Can you also make a video on RIM method

[@eric_andrews]

Hey Sabhi - curious, what's the RIM method? I haven't heard of it. Cheers

[@tharineeban1464]

great VDO ..

[@danieltambunan9717]

What is D&A ? How do you get that?

[@andreahelbet5420]

Eric thank you for this amazing video, you really made it understandable :) I have a question though, why isn't Equity value also adjusted for the Working Capital (what we owe and what is owed to us)?

[@yourstruly5DA]

It is already in Row 7: Chg in NWC

[@brovaird]

Hey Eric, since EV comes out to be around 12.2 million is it safe to assume that the business owners can sell it for exactly that much? If not, what would be a good selling price? Around 12million? What factors would go into that decision to not sell it for exactly the EV? EDIT: I guess I should have watched into the sensitivity analysis to see multiple factors affecting the price. However I think the question still is: What outside factors could affect the price? Maybe macroeconomic factors such as COVID affecting the overall economy? Thanks!

[@eric_andrews]

Hey - thanks for the question, I saw your other comment about looking to sell your family business. This is obviously a tricky subject, valuation. First off, the equity value would be what the business would sell for, not the EV. As the seller, you obviously want the highest price possible, but the $12.2MM would be a good starting point. Here are my thoughts and some ideas. Generally smaller companies get lower valuations than larger companies (in terms of earnings multiples, etc) as they are more risky, and they are less liquid (harder to sell), and have less access to capital. So it might be that you are putting in a higher discount rate and looking at a lower price. Also, the stability of cash flows impacts the valuation a lot. Companies with predictable revenue and profits are more valuable because it gives buyers more flexibility. Also, businesses that are growing fast get high valuations, and businesses that grow slowly get lower valuations. Macro factors can affect the price, but if your business is doing well during covid that is actually a positive thing. Many businesses are in bankruptcy right now and un-sellable. Apart from the DCF model, what I would do is look at the overall profits for the company for 2020 and apply a multiple to it. Probably 10 times 2020 earnings would also be a reasonable starting point. Some smaller businesses sell for lower multiples like 5-8X. All depends on how healthy the business is, whether its growing, and if the profits are stable year after year. I would look at the equity value from the DCF with a range of discount rates, as well as multiples of 2020 (or 2019) earnings ranging from 5-10X, unless it is a digital business in which case it could sell for much more.

[@brovaird]

@@eric_andrews thank you for your reply Eric! This helps a lot. Much appreciated

[@eric_andrews]

@@brovaird my pleasure

[@muhammadsuleman4079]

Eric, you're champ, thank you for sharing such a great content

[@eric_andrews]

Hey Muhammad its my pleasure, thanks for watching.

[@happyman5323]

Awesome

[@CerenEmre]

Thank you, helped a lot! Can you also build a DCF model for a biotech company with no revenue but has drugs in the pipeline going through the clinical phases? Would you build DCF models for each drug separately and sum the rNPV value? How do you estimate the market penetration rate for a drug at clinical stage? I would really appreciate to hear your comment. Best

[@eric_andrews]

Hey - super interesting question but I'm actually not sure how they value pharma drugs in clinical trials...i imagine with very high discount rates!! If you find out let me know 🙏 actually sounds quite interesting

[@ravikapoor9123]

you teaching technique is as simple as it should be especially for non-native English speakers without having any difficulty. Its like we are studying poem in kinder garden. Please upload merger and acquisition model and comparing company analysis videos, if possible ? give all other scenario to help build our career as financial analyst.

[@gauravkaushish1646]

Hi Eric, Can you please share or email me your 3 statement Financial model and Discounted cash flow model "excel sheet". The download link you shared in both videos is not working at my end Gaurav

[@eric_andrews]

Hey Gaurav - please try from a different browser, my landing pages are live and students are downloading the files constantly

[@fahedmustaf3885]

Do u have in apex and opex sheet

[@eric_andrews]

What is apex?

[@ALVpoker]

510,000-127,500+90,000-12,000-150,000= 310,500 not 334,500. Where is my mistake? 2:16

[@jeruiznyc]

Yes!! Same thing for me. Did you get a response?

[@sibulansajuluta6730]

ASANTE SANA NDUGU ERIC

[@eric_andrews]

You're welcome!

[@namok6143]

I think you forgot to add (1+g) in the formula at 5:16? Please fix me if I am missing anything

[@eric_andrews]

Watch the whole video 😅 it gets discounted after !!!

[@philongho399]

@@namok6143 đúng rồi bạn video tính thiếu fcff của 2029

[@oluseyiolojede5619]

Financial modelling simplified

[@pfknob]

At around the 9:15 mark you indicate that the Buyer gets the cash on the balance sheet. This is incorrect. The seller gets to keep the cash. Is cash an asset of the business when considering the sale? The simple answer is NO. The business owner retains any and all cash or cash equivalents, such as bonds or any money market funds. Cash is deemed to include any petty cash on hand and funds in the company's bank accounts.

[@brayanpineda2780]

Why you didn't use the FCF for 2023 when you calculted the enterprise value?

[@augustusg857]

Why use ebit? Free cash flow is a more realistic number than ebit and ebitda. Plus aren't all fcf Flows suppose to equal a company's value?

[@eric_andrews]

Hey - this video is a free cash flow model, did you watch the entire video? I agree 100%

[@augustusg857]

@@eric_andrews Yes I'm just confused with ebitda.

[@eric_andrews]

@@augustusg857 Sure, I can help. So EBIT and EBITDA are both non-cash metrics from the income statement. One is pre-tax operating profits (EBIT) and EBITDA is pre-tax operating profits but with depreciation adjusted out. Neither of them tells us the actual cash flow of a company, and neither of them tells us about the balance sheet (debt payments, new asset purchases, etc). So this video starts with just basically EBIT or EBITDA (either one, I show both because they are common) and I show you how to calculate the actual free cash flow before making debt payments, because that flow is what you are actually getting if you buy this company or what you need to value it. If these concepts are foreign to you I HIGHLY recommend you study my video on the 3 statement financial model, and everything will make a lot more sense after that, here it is: kzbin.info/www/bejne/rp27dY2vj56UsM0

[@bocobox]

need to brush up financial jargon. By the way,Ur template link is not working. Thank you a lot.

[@eric_andrews]

Sure! If you have any specific questions I'm happy to answer them right here in the comments. I realize there were quite a few accounting terms in that lecture. Happy to talk through them and explain. Maybe I should do some future videos on accounting basics too...interesting thought! Also, thanks for the heads up on the link - I had no idea!! I updated it to this one and I am pretty sure it works now: bit.ly/DCFdownload Please let me know if that links solves it for you. Cheers

[@AJ-iu6nw]

8:05

[@eric_andrews]

Hey everyone - thanks for watching! Just curious, what are you using this DCF model for in your personal / professional lives?

[@brovaird]

Using this to valuate my father's small business since he wants to sell and retire soon

[@pietervanberckel4160]

Help prepare myself for interviews VC & PE

[@eric_andrews]

@@pietervanberckel4160 Glad to hear it! Cheers Pieter!

[@thomasrichmond1259]

Valuing stocks; want to do it the best way

[@eric_andrews]

@@thomasrichmond1259 That's awesome. Keep doing your diligence!! Cheers Thomas

[@emirozgun3368]

Imagine saying perpetual growth method less accurate...

[@pietervanberckel4160]

Great stuff Eric