The most common business valuation method are: Discounted Cash Flows (DCF) and Comparable Values. Both methodologies must drive to a similar value.
The DCF method aims to make a financial projection of the company with time horizon of five to ten years so that analysis is consistent and credible.
The discount rate applied to this cash flow includes capital structure, cost of capital (WACC), cost of equity and cost of debt. We apply this discount rate to free cash flows by calculating the NPV (cash flow update). A terminal value (Gordon Shapiro) is estimated and updated from cash flow of last projected year that reflects company’s future growth. Net cash position, temporary financial investments and net financial debt (long-term debt and short-term bank debt) are deducted. By applying this methodology the value of the business and value of the shares are obtained.
As we can see, it can be a complex procedure, but it is most widely used and accepted valuation method. If you use DCF, it is critical to know the discount rate, the cost of capital (WACC), and obviously the free cash flows, since they would reflect profitability and real possible benefits of the investment.
