What discount rate should I use?
18 to 25% for an owner-managed SME. Below 12% implies a predictability most small businesses do not have; above 30% usually means the forecast is the problem, not the rate.
For an owner-managed SME, 18% to 25%. Below 12% implies a predictability that most small businesses genuinely do not have. Above 30% usually means you should be questioning the forecast rather than the rate.
What the rate actually represents
Not a technical parameter — the return a buyer needs to justify taking this risk instead of a different one.
- Listed equities
- 8–10%
- liquid, diversified
- Mid-market private
- 12–18%
- illiquid, concentrated
- Owner-managed SME
- 18–25%
- key-person risk, thin buyer pool
An owner using 10% for a business that depends on them personally is pricing their company as though it were a diversified portfolio. A buyer will not.
What moves you within the range
- Contracted revenue lowers it — future cash is more visible
- Customer concentration raises it — one relationship can end the forecast
- Owner dependence raises it, often by several points
- A track record of hitting forecasts lowers it more than most owners expect
The sensitivity to state up front
Show what your valuation does at your rate plus and minus three points. If nobody has seen that table, the first person to build it will be the buyer, and they will build it in their favour.
DCF valuation explained has the worked example; common valuation mistakes covers forecasts built backwards from a desired answer.