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name: olo-dcf-valuation version: 1.0.0 description: DCF valuation methodology for M&A due diligence — projections, sensitivity analysis, and terminal value calculation author: ololand.ai author_url: https://ololand.ai license: MIT triggers:

• dcf
• discounted cash flow
• wacc
• terminal value
• enterprise value
• intrinsic valuation
• equity value
• free cash flow tags:
• finance
• valuation
• m-and-a
• due-diligence

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DCF Valuation for M&A Due Diligence

Build discounted cash flow models for target company valuation in M&A contexts.

Unit System (Critical)

• Storage: Absolute dollars (raw financial data)
• Calculation: Millions (DCF models expect this)
• Display: Smart formatting (B/M/K based on magnitude)
• Never pass raw stored values directly into DCF calculations without unit conversion

Validation Before Calculation

1. Verify base revenue exists and is non-zero
2. Confirm WACC is between 5-25% (flag outliers with explanation)
3. Terminal growth must be less than WACC (Gordon Growth Model constraint)
4. Projection period: 5-10 years (default 5)
5. Verify EBITDA margins are within plausible industry range

Default Assumptions

Parameter	Default	Rationale
Tax rate	21% (US) / 17% (SG)	Adjust per jurisdiction
CapEx as % of revenue	5%	Adjust per industry (SaaS ~3%, manufacturing ~8-12%)
Terminal growth	2.5%	Should not exceed long-term GDP growth
WACC	CAPM-calculated	Fallback: 10-12% for mid-market
Depreciation	% of CapEx	Match to industry capital intensity
Working capital change	% of revenue delta	Use historical average if available

WACC Calculation (CAPM)

Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 - Tax Rate))

• Risk-free rate: 10-year Treasury yield
• Equity risk premium: 5-7% (Damodaran)
• Beta: Use comparable public companies, unlever/relever for target capital structure
• Size premium: Add 2-4% for small/mid-market targets

Projection Methodology

1. Revenue: Start from last reported, apply growth rates (declining toward terminal)
2. EBITDA: Apply margin assumptions (converge toward industry median)
3. Free Cash Flow: EBITDA - Taxes - CapEx - Change in Working Capital
4. Terminal Value: Gordon Growth Model or Exit Multiple method
5. Discount: Apply WACC to each year's FCF + terminal value

Terminal Value

Prefer Exit Multiple method for M&A (matches how buyers think):

• Apply EV/EBITDA multiple to terminal year EBITDA
• Cross-check with Gordon Growth implied multiple
• Flag if implied perpetuity growth exceeds 3%

Required Output

Always present:

• Enterprise Value range (low / base / high)
• Equity Value (EV - net debt)
• Implied EV/EBITDA multiple (sanity check against comparables)
• Sensitivity table: WACC (rows) vs Terminal Growth or Exit Multiple (columns)
• Football field chart if multiple valuation methods available

M&A-Specific Considerations

• Apply a control premium (20-40%) if valuing for acquisition vs. minority stake
• Consider synergy value separately from standalone DCF
• Discount rate should reflect buyer's cost of capital, not target's
• Model integration costs as a deduction from synergy value
• Present with-synergies and without-synergies valuations separately