How to Use TrueValue for DCF Valuations

Why DCF Remains the Gold Standard

Despite the proliferation of valuation methodologies, the Discounted Cash Flow analysis remains the most intellectually rigorous approach to determining what a business is worth. Unlike earnings multiples — which are inherently backward-looking and dependent on finding appropriate comparables — DCF is forward-looking and intrinsic. It values a business based on what it will generate, not on what similar businesses have sold for.

For UK M&A transactions, DCF is particularly important in several contexts: HMRC valuations for tax purposes (where the Shares Valuation Division often expects to see DCF analysis), shareholder disputes (where the courts require robust, defensible methodology), management buyouts (where lenders need evidence that future cash flows will service the acquisition debt), and private equity investments (where IRR-driven decision-making demands detailed cash flow modelling).

The challenge has always been that building a proper DCF model from scratch is time-consuming, technically demanding, and prone to errors. A bespoke Excel model with five-year projections, WACC calculation, terminal value, and sensitivity analysis typically takes an experienced analyst 12–20 hours. TrueValue reduces this to under two hours whilst eliminating computational errors and ensuring methodological consistency.

Getting Started: Importing Financial Data

Every DCF valuation begins with historical financial data. TrueValue offers three methods for importing this data:

1. Document upload — upload accounts exported from Xero, Sage, or QuickBooks and let TrueValue's AI extract three to five years of financial data
2. Spreadsheet upload — upload management accounts or statutory accounts in Excel or CSV format using TrueValue's standardised template
3. Manual entry — input key financial figures directly into the platform's structured data entry interface

Whichever method you choose, TrueValue validates the imported data for internal consistency — checking that the balance sheet balances, that cash flow reconciles to profit movements, and that revenue figures are consistent across different reports. Any discrepancies are flagged for investigation before the valuation proceeds.

Automated Normalisation

Once historical data is imported, TrueValue's AI-assisted normalisation engine identifies potential adjustments to reported earnings. The platform scans for common normalisation items:

• Above-market director and owner remuneration — benchmarked against sector salary data
• One-off costs — legal settlements, restructuring charges, COVID-related expenses
• Non-recurring revenue — government grants, asset disposal gains, insurance recoveries
• Related party transactions — rent, management charges, or purchases at non-market rates
• Non-cash items — share-based compensation, asset impairments, provisions
• Personal expenses — vehicles, travel, entertainment, and other items that would not continue under new ownership

Each suggested adjustment is presented with supporting evidence and the advisor approves, modifies, or rejects it. This guided approach ensures thorough normalisation whilst maintaining professional oversight. The normalised EBITDA figure becomes the starting point for cash flow projections.

Projecting Free Cash Flows

The explicit forecast period is where the DCF model captures the business's expected performance over the next three to ten years. TrueValue's projection engine builds forecasts from normalised historical data, applying growth assumptions and margin expectations set by the advisor.

Revenue Projections

TrueValue offers multiple approaches to revenue forecasting:

• Growth rate method — apply a constant or variable annual growth rate to historical revenue
• Bottom-up build — project revenue by product line, customer segment, or geography
• Contract-based — for businesses with contracted revenue, model known renewals and expected new business separately
• Market-driven — link revenue growth to market size forecasts and market share assumptions

The platform pre-populates growth rate assumptions based on the business's historical performance and sector benchmarks from TrueValue's UK market database. Advisors can accept, adjust, or override these suggestions based on their knowledge of the specific business and its prospects.

Operating Cost Projections

Cost projections in TrueValue are built from the normalised cost structure, with each cost line categorised as fixed, variable, or semi-variable. Variable costs are linked to revenue through a margin assumption, ensuring that cost projections remain internally consistent with revenue forecasts. Fixed costs are inflated at a user-defined rate (defaulting to the Bank of England's target inflation rate of 2%).

Capital Expenditure and Working Capital

Free cash flow requires two further adjustments: capital expenditure and changes in working capital. TrueValue models both based on historical patterns:

• Capital expenditure — split into maintenance capex (required to sustain current operations) and growth capex (investment for expansion). Maintenance capex is typically modelled as a percentage of revenue or depreciation.
• Working capital — modelled using debtor days, creditor days, and stock days derived from historical data. The platform calculates the incremental working capital investment required to support projected revenue growth.
• Tax — corporation tax at the prevailing UK rate (currently 25% for profits above £250,000) applied to projected operating profits, with adjustments for available tax losses or R&D credits.

Calculating the Discount Rate (WACC)

The discount rate is arguably the most important — and most debated — input in any DCF model. TrueValue calculates the Weighted Average Cost of Capital using the following framework:

Cost of Equity (CAPM)

TrueValue uses the Capital Asset Pricing Model to estimate the cost of equity:

• Risk-free rate — the current yield on 10-year UK gilts (approximately 4.2% in early 2026)
• Equity risk premium — the additional return investors demand for holding equities over risk-free assets (5.0%–6.0%, based on Dimson-Marsh-Staunton long-run data)
• Beta — a measure of systematic risk relative to the market. For private companies, TrueValue uses unlevered betas from comparable listed companies, re-levered for the target's capital structure
• Size premium — an additional risk premium for smaller companies (2.0%–4.0%), reflecting the higher risk associated with less diversified businesses
• Company-specific risk premium — a discretionary adjustment (0%–5%) for company-specific factors such as customer concentration, key person risk, or regulatory exposure

Cost of Debt and Capital Structure

The cost of debt is the after-tax interest rate on the company's borrowings. TrueValue defaults to the company's actual borrowing rate if known, or estimates it based on the current Bank of England base rate plus a credit spread appropriate for the company's size and sector. The capital structure weighting uses either the company's actual debt-to-equity ratio or a target capital structure based on sector norms.

All WACC inputs are fully transparent and adjustable. The platform shows the calculated WACC alongside the implied cost of equity and cost of debt, allowing advisors to assess whether the overall rate feels appropriate for the risk profile of the business. A typical WACC range for UK SMEs is 12%–18%, compared to 8%–12% for larger mid-market businesses.

Modelling Terminal Value

The terminal value captures the business's value beyond the explicit forecast period and typically represents 60%–80% of total DCF value. TrueValue supports two terminal value approaches:

Gordon Growth Model (Perpetuity)

This method assumes the business grows at a constant rate in perpetuity after the forecast period. The terminal growth rate should reflect long-term sustainable growth — typically 1.5%–2.5% for mature UK businesses, aligned with long-run GDP growth expectations. TrueValue validates that the terminal growth rate does not exceed the discount rate (which would produce a mathematically impossible infinite value).

Exit Multiple Method

This method applies an EBITDA or revenue multiple to the final year's projected earnings. The exit multiple is typically set at the current sector average, which TrueValue pulls from its comparable transaction database. This approach is often preferred by practitioners because it is grounded in observable market data rather than perpetuity assumptions.

TrueValue calculates terminal value using both methods and presents the results side by side, allowing advisors to assess which approach produces the more reasonable outcome for the specific business being valued.

Sensitivity Analysis and Scenario Modelling

A single-point DCF estimate is of limited use — it implies a precision that the underlying assumptions cannot support. The real value of DCF analysis lies in understanding how the valuation changes across a range of plausible scenarios.

TrueValue's sensitivity analysis module automatically generates:

• Two-way sensitivity tables showing valuation across combinations of key variables (e.g., WACC vs terminal growth rate, or revenue growth vs operating margin)
• Tornado charts ranking inputs by their impact on valuation — showing which assumptions matter most
• Scenario analysis — base case, upside, and downside scenarios with user-defined assumptions for each
• Monte Carlo simulation — for advanced users, probabilistic modelling that generates a distribution of possible valuations based on ranges for each input
• Breakeven analysis — what assumptions would need to hold true for the business to be worth a specific target price

These analyses transform the DCF from a black box into a transparent, discussable framework. When a client can see that the valuation ranges from £4.2 million (downside) to £7.8 million (upside) with a base case of £5.9 million, the conversation shifts from "Is this the right number?" to "What do we believe about these assumptions?" — which is a far more productive discussion.

Generating Professional DCF Reports

Once the analysis is complete, TrueValue generates a comprehensive DCF valuation report suitable for client presentation, investment committee review, or regulatory submission. The report includes:

• Executive summary with key valuation conclusions and methodology overview
• Detailed financial analysis — historical performance, normalisation adjustments, and projections
• Free cash flow build-up with supporting assumptions documented
• WACC calculation with all inputs and sources referenced
• Terminal value analysis using both perpetuity and exit multiple methods
• Sensitivity tables and scenario analysis results
• Comparable transaction benchmarking from TrueValue's UK database
• Appendices with detailed financial statements and assumption schedules

Reports are generated in PDF and DOCX formats, with the option to share via TrueValue's secure client portal. The portal allows clients to interact with the valuation — exploring scenarios and understanding the impact of different assumptions — in a branded, professional environment.

Ready to run your first DCF on TrueValue? Explore our features, review our pricing, check our FAQ, or contact our team for a guided demonstration.