Our automated business has highly predictable cash flows, but the buyer's analysts are building a highly speculative Discounted Cash Flow model that discounts our terminal value. How do we push them to use the Capitalization of Earnings Method instead?

Question

Tyler Smith · Accepted Answer

Buyers often use highly complex Discounted Cash Flow models to introduce subjective assumptions, high discount rates, and conservative terminal values that artificially suppress your valuation. When your business has a long-term track record of predictable cash flows, you should push back and demand the use of the Capitalization of Earnings Method.

Under recognized valuation frameworks, the Discounted Cash Flow method is best suited for businesses with highly volatile, unstable, or rapidly changing future cash flows where historical results are not a reliable proxy. In contrast, the Capitalization of Earnings Method is the standard for established companies with stable operations.

To redirect the valuation methodology, construct your defense on these points:

- Demonstrate that your automated processes and operating system have produced highly consistent historical margins over the past three to five years.
- Argue that projecting detailed cash flows out five or ten years introduces unnecessary speculation compared to capitalising your current, proven earnings stream.
- Calculate a defensible capitalization rate based on objective market risk premiums, and apply this directly to your normalized, LTM EBITDA.

By anchoring the valuation in actual historical performance rather than speculative future projections, you eliminate the buyer's ability to discount your terminal value based on arbitrary long-term assumptions.