We all have bank accounts that accrue interest, earning interest on the principal and then interest on the interest. DCF is the reverse of a bank account or bond.

In a DCF analysis, the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of a business is projected over a certain number of years, usually around 15. An interest rate, typically between 10% and 15%, is applied. This rate represents the return that the buyer expects to earn on their invested capital.

Instead of compounding forward like in a bank account, the cash flows are discounted back to their present value. This is one method to value a business.

DCF can be expressed as a multiple of EBITDA to simplify the valuation process.