Using some flavor of discounted cash flow to value an acquisition is by far my least favorite method. Don't get me wrong, DCF is quite handy and preferred for doing most valuations related to ongoing business operations. But sellers always use DCF based on projections to determine value. It's the projections, not the DCF, that are always wrong and always wrong in the wrong direction (we'll deal with projections tomorrow). In an acquisition, the only DCF I care about is the one I create to justify that the acquisition is more economical than building it in-house.
Note to Investment Bankers: I just flipped through a couple dozen valuation books that I've received over the last few years, and the average number of Excel sheets devoted to DCF is seven (not including projections and assumptions) with the low being two and the high being a remarkable 23. Then I was able to calculate one of the DCF's on my HP 17b. The point is no one needs to see seven pages of this stuff. One sheet is perfect, two is acceptable.
Here's how I bust-up your DCF. After reviewing your banker's seven pages of DCF calculations, I complain that I just don't understand how the DCF works thereby requesting an electronic copy of it and your projections. Then I call back and say that the DCF looks great, but I'd like to meet to go over your projection assumptions, as I have several questions.
The work I do prior to the meeting is to change your projections and watch how the changes impact the DCF. The trick I do prior to the meeting is to change my Excel, so I have to manually recalculate formulas (Tools, Options, Calculations). Hitting the F9 key recalculates, but to only recalculate the active sheet hold the Shift key while pressing F9.
When we meet I suggest that we make any changes (I put your projections back to their original form for the meeting) in real-time using my laptop and a projector. During the meeting I attack your projections, assumption by assumption, making small, subtle changes, as I know which areas to hit and how far to hit them. But it's most important that I get you to agree with the changes (since most CEOs know that the projections are BS this isn't that hard). You can't see the impact because Excel isn't recalculating the formulas. If you inquire about this strange phenomena, I simply say that there is something wrong with my Excel, and we'll I have to recalculate all the formulas at the end. When that happens, F9 is not your friend.