Why are Mergers and Acquisitions professionals hesitant to rely on discounted cash flow in valuation discussions?

The hesitance of Mergers and Acquisitions professionals to rely on discounted cash flow (DCF) in valuation discussions primarily stems from the subjectivity involved in forecasts and discount rates. In DCF analysis, estimations of future cash flows and the selection of an appropriate discount rate can significantly influence the calculated present value of an investment. These inputs often depend on various assumptions about future market conditions, growth rates, and risk factors, which can vary widely among different analysts. Such variability introduces a level of uncertainty and subjectivity that can make the resulting valuation less reliable.

Professionals understand that even minor changes in cash flow predictions or discount rate assumptions can lead to substantial differences in valuation outcomes, making it challenging to arrive at a consensus or a solid justification for the assessed value. This concern about subjectivity can lead M&A professionals to favor other valuation approaches that may offer more straightforward methodologies or rely more heavily on observable market data.