Business Valuation Methods: DCF, NAV and Multiples

Three methods cover almost every valuation a business is asked to defend: discounted cash flow, net asset value and market multiples. The question is rarely which one is correct; it is which one fits the business, and what the number is being used for.

This guide explains how each method works, what inputs move the answer the most, and the specific pushback that investors and auditors raise on each, so the number presented is one that can actually be defended in the room.

Discounted cash flow: valuing the cash the business will generate

A discounted cash flow model projects the business's free cash flow over an explicit period, commonly five to ten years, and discounts each year back to a present value using a discount rate, usually the weighted average cost of capital built from the cost of equity and the cost of debt in the target capital structure. A terminal value, covering everything beyond the explicit period, is then added, using either a perpetual growth rate or an exit multiple.

The discount rate and the terminal growth rate move the answer more than almost anything else in the model, because the terminal value commonly makes up more than half of the total value, sometimes the majority of it. A model that looks rigorous in every other respect can still be unreliable if these two assumptions are not benchmarked against comparable businesses and current market conditions.

Net asset value: when the balance sheet is the business

Net asset value takes the fair value of a company's assets and subtracts its liabilities, adjusting book values to current market values where they differ, for land, investments, unlisted holdings and similar items. It fits businesses where earnings do not capture the value, such as non-banking finance companies, investment or holding companies, and real estate businesses holding appreciating land.

For an operating business with genuine earning potential, net asset value on its own tends to understate what the business is worth, and most Indian pricing rules that mention it, including the FEMA pricing guidelines for non-resident investment, do not accept it as the sole basis for a valuation. It works well alongside, not instead of, a cash-flow or multiples-based method.

Market multiples: pricing a business against its peers

Market multiples value a business by applying a ratio, such as enterprise value to EBITDA or price to earnings, drawn from comparable listed companies or from precedent transactions where similar businesses actually changed hands. The method lives or dies on the peer set: companies of a similar size, growth rate and margin profile in the same line of business, not simply the same broad industry label.

Two adjustments usually follow. A control premium is added when the transaction transfers a controlling stake rather than a small minority position, since control carries the right to change management and strategy. A discount for lack of marketability is subtracted for shares in a private company that cannot be freely traded the way a listed share can.

What moves the number the most

Across all three methods, a short list of inputs explains most of the difference between a generous valuation and a conservative one:

• The discount rate and the terminal growth rate in a discounted cash flow model
• Revenue and margin assumptions in the explicit forecast period, especially how quickly growth is assumed to slow
• The comparable peer set chosen for a multiples-based valuation, and whether it is genuinely similar or simply convenient
• Normalisation adjustments to EBITDA, such as removing one-off costs, related-party rent, or promoter remuneration adjusted to a market rate
• The size of the marketability discount or control premium layered onto the base number

The pushback auditors raise, and the pushback investors raise

Auditors, typically reviewing a valuation prepared for impairment testing or for allocating the price paid in an acquisition, interrogate the discount rate and the terminal growth rate against observable market benchmarks, and check the cash flow projections against the business's own track record of hitting its budgets. A model that has never matched its own past projections gets little benefit of the doubt on its future ones.

Investors tend to push on different points: whether EBITDA add-backs are genuine one-off items or simply inconvenient recurring costs, whether the comparable companies chosen are truly similar or picked because they carry a higher multiple, and whether the underlying projections assume a level of growth the business has not yet shown it can deliver.

Picking the method that fits

A discounted cash flow usually fits a business with visible future cash flows, which covers most operating companies and startups past their earliest revenue stage. Net asset value fits asset-heavy or holding businesses where the balance sheet, not the income statement, carries the value. Market multiples work well as a cross-check on a discounted cash flow number where a credible peer set exists, rather than as the only method relied on.

In practice, most valuation reports that need to survive scrutiny use more than one method and present a range, reconciling where the methods agree and explaining where they do not, rather than presenting a single number as if no judgement went into it.

Frequently asked questions

Which valuation method do Indian regulators actually accept?

It depends which law is asking. Rule 11UA under the Income-tax Act prescribes a formula method for unquoted equity shares. A discounted cash flow certified by a merchant banker was only ever available under Rule 11UA as an alternative for section 56(2)(viib), the angel tax provision abolished from FY 2024-25. FEMA pricing for non-resident investment requires an internationally accepted methodology, which in practice means discounted cash flow or comparables, with net asset value alone generally not accepted. A Companies Act registered valuer's report can use whichever method the valuer considers appropriate to the facts, disclosed in the report itself.

Why do two valuers sometimes give very different numbers for the same company?

Because the discount rate, the terminal growth assumption and the forecast itself are all judgement calls within a reasonable range, not fixed inputs, and because a discounted cash flow and a multiples-based method can legitimately disagree on whether the market is currently ahead of or behind what the underlying numbers support.

Can a business use different valuation methods for different purposes at the same time?

Yes, and most growing businesses do. A discounted cash flow built to support an investor round can sit alongside a Rule 11UA fair market value for income tax and a separate registered valuer's report for a Companies Act scheme, each answering a different legal question as of a different date; getting one does not automatically answer the others.

Does a higher valuation always help the company?

Not always. A high valuation fixed for one purpose can become the baseline that an investor, an acquirer or a tax officer measures every later transaction against, so the number needs to be defensible on its own facts and methodology, not simply favourable in the moment it is set.

Related guides

• When Indian law requires a registered valuer
• Valuation for ESOPs, buybacks and SME IPO pricing
• The startup valuation report, explained
• Valuation and advisory services