A discounted cash flow, DCF, analysis values a business by forecasting its future cash flows over a multi-year period and discounting them back to today at a rate reflecting their risk, rather than capitalising a single stable-earnings figure.
The choice between a DCF and a capitalisation rate is a choice the Business Development Bank of Canada's guide to valuing a business frames directly: "different earnings-based approaches are used depending on whether earnings are expected to be stable in coming years." A single capitalised figure stands in for a forecast when earnings are stable; a DCF is built when they are not — which is exactly the profile of an early-growth or turnaround acquisition, not a mature, flat-earnings target.
A DCF built for a formal opinion is governed by the same Chartered Business Valuator that governs every other CBV report — Practice Standards 100, 110, 120 and 130 "apply to independent valuation engagements beginning on or after January 1, 2026" and "set the minimum requirements for a valuator to establish a credible and properly supported conclusion of value." Where the conclusion feeds a fairness opinion rather than a general valuation, CBV Institute's separate 510/520/530 report family applies instead.
A DCF also has to line up with how a deal is actually paid for. Where part of the price is deferred — a vendor take-back or an earn-out — the forecast a DCF discounts and the tax reserve available on that deferred amount are governed by different rules: ITA s. 40(1)(a)(iii) allows a reserve on proceeds "payable to the taxpayer after the end of the year," capped at a five-year spread in the ordinary case (extended to ten years only for specific intergenerational, employee-ownership-trust or family-farm transfers). A DCF that assumes a payment timeline the tax reserve rules don't support is modelling a deal the numbers won't actually match.
A growth-stage company is forecast to generate $200,000, $350,000, $500,000, $650,000 and $800,000 of free cash flow over the next five years, after which a terminal value is estimated by capitalising year-five cash flow at a long-run rate. Each year's cash flow, and the terminal value, is discounted back to today at a rate reflecting the business's specific risk (these figures are the worked example's own assumptions, set for illustration, not a published Canadian benchmark). The DCF's answer is the sum of those discounted amounts — a figure that, unlike a capitalised single-year number, is built to survive a business whose earnings are still changing shape year to year.
See also: Capitalisation rate · Chartered Business Valuator (CBV) · EBITDA bridge.
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