Business Valuation Review Volume 40: Issue 1

Estimating growth in net cash flows is one of the key components in applying the discounted cash flow (DCF) method in valuing any company, reporting unit, or other business unit. This paper explains the underlying assumptions of the DCF method and demonstrates how to compare the most commonly used basis for estimating net cash flows (sometimes referred to as free cash flows), expected organic growth, to historic estimates of growth of the subject company and estimates of earning growth commonly prepared by security analysts.

All corporate valuation models rely on very long forecasts of free cash flows. The only question is whether those forecasts are accounted for explicitly by using an extended valuation model or implicitly in an estimate of the terminal value after an explicit short-term forecast period of five to ten years. Given current computing technology, there are good reasons to use projections running out multiple decades. Doing so gives a clearer picture of the long-run issues that affect a company's value. Of course, developing very long-term forecasts is difficult and may be considered speculative, but the difficulty and speculation are not removed by assuming that at a horizon of five or ten years the firm enters steady state and applying a constant growth terminal value model. A better approach in many circumstances may be to explicitly take account of the need for very long-term forecasts, raising the question: “Is it time to terminate the traditional terminal value?”

This article discusses current developments in Delaware case law as they relate to valuation. It reviews all relevant Delaware Supreme Court decisions since 2017 and all relevant Court of Chancery decisions since 2019. We discuss the emphasis being placed by the Delaware courts on using discounted cash flow for valuations in related party transactions, as well as the substantial reliance on transaction price as the valuation measure in arm's-length transactions that have a satisfactory negotiation process. We conclude with a discussion of the impact of these and prior Delaware decisions on the valuation community and comments on the role of expert witnesses.

Kyle: First, congratulations on your Lifetime Achievement Award from the American Society of Appraisers. What does receiving a Lifetime Achievement Award mean to you?

Jay: It was a surprise! ASA has been a big part of my professional life and through the ASA, I got to meet some terrific people, some of whom have become friends, travel the world, and increase my knowledge base, so it was humbling that the ASA would honor me in that way. It also says that I am old.

Kyle: So looking back, how did you get into business valuation?

Jay: When you look around

From the Editor

Comparing Growth Rates Used in Discounted Cash Flow Valuations

Is It Time to Terminate the Traditional Terminal Value?

Recent Developments in Delaware Valuation Cases

Business Valuation Review: A Lifetime in Support of the Profession

From the Chair

Volume 40, No. 1 — Complete Issue

From the Editor

Customer Concentration: Good, Bad, or Ugly?

From the Chair

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue