Research on Business Models in their Life Cycle
Future free cash flow is a crucial element of most business valuation tools, such as the Discounted Cash Flow model, with the quality of the valuation depending heavily on its forecast accuracy. This paper explores the theory on business life cycle (and growth) models in an aim to improve that quality. Life cycle and growth models have been studied in the management and organization literature for decades, but the relevant aspects from a business valuation perspective remain unclear. Reviewing
... unclear. Reviewing the existing literature, we argue that the five-stage Hanks model (Start-up, Growth, Maturity, Diversification, and Decline) is applicable for valuation purposes. We further argue that life cycle thinking provides useful insights for making grounded assumptions in predicting the future free cash flows and residual value of a company. This paper presents practical valuation approaches and insights for each of the five stages of the Hanks model. Practical relevance Discounted Cash Flow is a common valuation method that relies on difficult-to-make estimations of future Free Cash Flow (FCF) and Residual Value (RV). We argue that practitioners may benefit from including business life cycle modeling in assessing the expected FCF and RV to improve the quality of their valuations.