Discount Rate

A discount rate that incorporates a premium reflecting the specific risks associated with a particular asset, cash flow stream, or investment. In intangible asset valuations, risk-adjusted discount rates are typically higher than the weighted average cost of capital to reflect the greater uncertainty inherent in intangible asset cash flows compared to tangible assets.

The rate used to convert a single-period earnings or cash flow figure into an indication of value, calculated as the discount rate minus the expected long-term sustainable growth rate. The capitalisation rate is the reciprocal of the capitalisation multiple and is used in the capitalisation of earnings method for businesses with stable, predictable income streams.

A reduction to business value reflecting the risk that the departure of one or more critical individuals would materially impair the company's earnings, relationships, or operational capability. Key person discounts are most significant in professional services, early-stage ventures, and founder-led businesses where revenue concentration or specialised expertise is tied to specific individuals.

The annualised rate of return at which the net present value of all cash flows from an investment equals zero. IRR is the standard performance metric for private equity and venture capital funds, allowing comparison across investments with different holding periods and cash flow profiles.

A reduction applied to the pro-rata value of a business interest to reflect the lack of control associated with a minority ownership position. Minority discounts account for the inability of minority shareholders to influence key decisions such as dividend policy, asset sales, and management appointments.

The annualised rate of return that smooths out growth over multiple years, calculated as (ending value / beginning value)^(1/years) minus one. CAGR is used to compare growth trajectories of companies or metrics across different time periods.

The rate at which a company's existing customers cease doing business with it over a given period, typically expressed as an annual percentage. Customer attrition rate is a critical input to the valuation of customer relationship intangible assets under both the multi-period excess earnings method and the distributor method.

The theoretical rate of return on an investment with zero default risk, used as the foundation for building discount rates in valuation. In practice, the yield on government bonds of a maturity matching the expected cash flow duration serves as a proxy — typically US Treasury bonds for USD-denominated valuations or UK gilts for GBP-denominated analyses.

What is obsolescence risk and why does it matter in technology valuation?

Obsolescence risk is the danger that technology becomes outdated or superseded, reducing its useful life and economic value — higher for proprietary tech, lower for platforms.

What is the weighted average cost of capital (WACC)?

WACC is the average cost of all capital sources (debt and equity) a company uses, weighted by their proportions — it is the minimum return the company should generate to satisfy all investors.

How do private equity firms value portfolio companies?

PE firms typically use a combination of EBITDA multiples, discounted cash flow (DCF) analysis, and comparable transactions, with increasing focus on identifying and valuing intangible assets that drive sustainable growth.