Discounted Cash Flow (DCF): A Simple Way to Think About What Price to Pay for a Business

By: Noel C Ducusin

When people talk about valuing a business, especially in acquisitions or investments, the conversation often turns technical very quickly. One term that comes up almost immediately is “discounted cash flow,” or DCF. It sounds complicated, but the idea behind it is far more practical and intuitive than the jargon suggests.

Why Discounted Cash Flow Comes Up in Deals

When someone is buying a company, or even just a portion of it, the biggest question is always price. What is this business really worth?

One common way buyers and sellers approach that question is by looking at the future cash the business is expected to generate. DCF is simply a framework for doing that. Instead of focusing on past performance or headline profit numbers, it asks: how much cash will this business likely produce going forward, and what is that worth today?

That focus on future cash is why DCF is so often used in acquisitions, investments, and buyouts.

Why “Discounted Cash Flow” Sounds Complicated (and Why It Doesn’t Have to Be)

The term itself sounds technical and intimidating. In reality, it describes a very simple idea: money in the future is worth less than money today.

This is not about complex formulas or spreadsheets. At its core, DCF is about common sense. It is a way of comparing money you expect to receive in the future with money you have in your hand right now.

The Jargon Problem

In valuation reports and M&A discussions, DCF is often wrapped in dense technical language. These explanations are usually accurate, but they are hard for non-finance readers to relate to.

You’ll often see definitions like:

“Discounted cash flow is a valuation methodology that determines enterprise value by discounting forecasted free cash flows to the firm at the weighted average cost of capital, inclusive of a terminal value derived under a perpetual growth assumption.”

Or:

“DCF analysis estimates intrinsic value by computing the present value of projected distributable cash flows using a risk-adjusted hurdle rate that reflects the opportunity cost of capital and inflation expectations.”

These statements may be technically correct, but they don’t help most business owners or deal participants understand what is actually happening. When you strip away the jargon, all of these explanations point to the same simple logic: time, risk, and inflation affect the value of money.

The Common-Sense Idea Behind DCF

Cash today can be used, invested, or saved immediately. Cash received in the future cannot.

Because of that difference, future cash needs to be adjusted before it can be fairly compared with today’s money. That adjustment is what people mean when they talk about “discounting.”

DCF is simply the process of bringing future cash back to today’s terms so you can compare apples to apples.

How DCF Is Actually Built (In Plain English)

DCF starts at the day you buy the business.

You begin by estimating how much cash the business is likely to generate in the first year after the purchase. Then you do the same for the second year, the third year, and so on. You are not doing anything mysterious. You are just laying out expected future cash on a timeline.

These numbers are projections. They are educated estimates based on assumptions about growth, stability, and changes in the business. They are not promises or guarantees.

What Gets Projected

The focus in DCF is on cash the business can actually produce, not accounting profits on paper.

Each year’s estimate reflects what you think will realistically happen: modest growth, flat performance, expansion, or even decline. At this stage, the assumptions behind the numbers matter far more than fine-tuned precision. A perfectly calculated number based on the wrong assumptions is still wrong.

Why Future Cash Needs Adjustment

Money received later is less useful than money received now.

Cash received today can earn interest or returns starting from day one. Cash received in the future cannot earn anything until it actually arrives. On top of that, there is always the risk that future cash may not show up as expected. Inflation also reduces purchasing power over time.

Because of all these factors, future cash is adjusted downward when viewed from today’s perspective. This adjustment is the heart of discounted cash flow.

The Discount Rate, Explained Simply

The discount rate is the rate at which future cash flows are adjusted so they can be expressed in today’s value.

In practical terms, it reflects how much those future cash flows should be reduced to account for time, risk, and the fact that money could be invested elsewhere right now. It represents the return an investor requires before treating future cash as comparable to cash today.

Once you understand that, a natural follow-up question arises:

If I am giving up money today and waiting for uncertain cash in the future, what level of return makes that trade-off reasonable?

A simple rule applies.

Stable, predictable businesses can justify lower discount rates. Riskier or more uncertain businesses require higher ones. The higher the risk, the more future cash is reduced when viewed from today, even if the projected numbers look impressive on paper.

This is why the discount rate plays such a critical role in DCF. It prevents optimistic projections from being taken at face value. Large future cash flows do not automatically translate into high value if the path to those cash flows is uncertain.

In that sense, DCF acts as a reality check. It forces deal participants to think not just about how much money might be earned, but how confident they are that it will actually materialize.

Terminal Value: Looking Beyond the Forecast

No one can reasonably forecast cash forever.

At some point, projections stop, usually after five or ten years. Terminal value is an estimate of what the business might still be worth after that projection period ends.

In simple terms, it assumes either that the business continues generating cash in the long term, or that it could be sold for a reasonable price in the future. Because this part of the model looks far into the future, it is highly speculative. In many DCF models, terminal value makes up a large portion of the total valuation.

For that reason, it should always be treated with caution.

Why DCF Is a Reference Point, Not the Final Price

In real transactions, deals are not closed by spreadsheets alone.

DCF helps structure expectations and frame negotiations, but the final price depends on many other factors: strategy, leverage, timing, market conditions, and the relative bargaining power of the parties. Projections guide discussions. They do not dictate outcomes.

What DCF Is Good For (and What It Isn’t)

DCF is useful for thinking clearly about long-term value and for comparing different opportunities using a consistent framework.

It is not a prediction tool. It does not remove uncertainty. And it does not replace judgment, negotiation, or commercial reality.

Discounted cash flow is simply one way to think about what a business is worth.

It asks a disciplined question: what is the future cash of this business worth today, given time, risk, and inflation? The answer is never exact, but the thinking behind it is valuable.

Keep This in Mind When Entering Negotiations

When entering negotiations, it helps to remember what DCF is really telling you. It is not a promise of future performance, and it is not a final answer on price.

It is a structured way to frame expectations, understand trade-offs, and test whether assumptions make sense. Buyers and sellers can reasonably disagree on projections, risk, and long-term outlook. That is normal.

DCF provides a common language for those discussions. The deal itself, however, is ultimately shaped by negotiation, leverage, and commercial judgment.

About the Author

Atty. Noel C. Ducusin is the Director for M&A at DoingBusinessPH, where he works with offshore investors—primarily from Japan, Europe, the US, and Southeast Asia—seeking to enter the Philippine market through acquisitions, joint ventures, and strategic partnerships. He also advises local companies, family offices, and high-net-worth individuals on originating and executing transactions, including preparing businesses to be investment-ready through reverse due diligence.

His work spans the full M&A cycle: identifying counterparties, managing due diligence, leading negotiations, structuring transactions, arranging financing, and coordinating with trusted vendors such as banks, suppliers, and contractors. For startups and new ventures, he helps design fundraising-ready structures and connects them with investors, making DoingBusinessPH a natural bridge between global capital and local opportunity.

Beyond transactions, Noel and his team provide executive education and professional development through speaking events, seminars, and small-group sessions like business lunches and roundtables, then carry that value forward into practical, business-ready solutions. These include annual subscriptions for legal and regulatory updates, customized in-house corporate training, and post-event compliance audits, along with exclusive deep-dive masterclasses and peer mastermind groups for executives. They also prepare executive toolkits with ready-to-use templates and offer premium one-on-one consulting sessions—all designed to turn the insights gained from these settings into clear, actionable steps that help investors and businesses navigate the Philippine market with confidence.

A lawyer by training with a degree in Business Management, Noel is also Senior Partner at N. Ducusin & Partners Law Offices, which specializes in Mergers & Acquisitions, Investments, Cross-Border Regulatory, and Corporate Advisory. Over the years, he has developed deep, practical expertise in corporate finance, company valuation, and financial modeling through hands-on involvement as part of the deal team in live transactions. This combination of legal and financial experience allows him to bridge both perspectives seamlessly, ensuring that deals are not only executed but positioned for long-term success.

He is always looking forward to comparing notes with investors, startups, and vendors to explore where his clients’ mandates align with theirs and to uncover potential opportunities and collaborations that benefit both sides. Please feel free to connect with him to continue the conversation and explore where your goals and his clients’ interests may intersect.

His mission for this blog is to help foreign investors, business owners, and managers by breaking down complex legal concepts and dense technical material into simple, straightforward, and actionable insights for better business decisions. Articles and briefs are written in plain everyday language, without jargon or unnecessary academic writing—the simpler and more practical, the better.

“Everything should be made as simple as possible, but no simpler.” – Albert Einstein