Pay more attention to corporate mortality in a DCF

BVWireIssue #174-4
March 22, 2017

The typical DCF valuation assumes that a mature company will survive and grow at a constant rate in perpetuity. Is this a valid assumption? No, says Gil Matthews (Sutter Securities). In a session he presented at the recent OIV Business Valuation International Conference (Milan, Italy), he said that this assumption is invalid because of the impacts of: (1) corporate mortality; and (2) decelerating company growth due to economic changes and/or obsolescence. Not considering these factors may result in an overstated value if you use a constant perpetual growth assumption.

“Not all firms operate into perpetuity—some of them die,” Matthews tells BVWire. He points out that there is research available on firm decline and mortality, but more study is needed. Also, the valuation community needs to consider how to quantify the risks of these factors so they can be reflected in higher discount rates and/or lower long-term growth rates. The risk is greater for younger firms and also smaller firms, he says.

Matthews will expand on these thoughts in a presentation he will give at the ASA’s 2017 Advanced BV Conference in Houston (October 7-10).

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