Build cash flows from operating drivers
Revenue, margins, taxes, capital expenditure and working capital should reflect the operating plan. Forecasts need to explain the investment required to support growth, rather than treating growth as free. Use a forecast period that allows a reasoned view of the transition to a more stable business.
Keep the model internally consistent
Match the discount rate to the cash flow: cash available to all capital providers differs from cash available to equity holders. Currency, inflation and tax assumptions should also align. When moving from enterprise value to equity value, consider debt, surplus assets and other relevant claims.
Make uncertainty visible
A terminal value can contribute materially to the result, so its economics deserve scrutiny. Test plausible changes in growth, margins and discount rates. Sensitivity analysis should show where judgement matters most, while scenarios can describe different operating paths rather than changing isolated cells.
Further reading
NYU Stern · Valuation resources (opens in a new tab)NYU Stern · Terminal value approaches (opens in a new tab)For general understanding. The appropriate method, professional appointment and regulatory treatment depend on the purpose, date and circumstances of the engagement.