Young, fast growing companies have a higher risk of failure compared with more mature entities. In order to discount this risk, survival rates are multiplied by the forecasted cash flows, taking the valuation cash flows’ expected value into consideration.
Sources and further calculations
Survival rates are computed as the percentage ratio between companies founded in a given year of the past and survived 1, 2, etc. years and all companies founded in the same past year.
Public institutions and researchers all over the world periodically survey national companies to estimate country-level survival rates. Equidam’s sources for the first three years of survival rates are the European Office of Statistics (http://ec.europa.eu/eurostat) for EU countries, the Bureau of Labor Statistics (https://www.bls.gov/) for the US, and many academic articles and institutional reports for other countries.
In order to compute the rest of the survival curve, a function is fit on the first three years. Survival rates are then computed up to 10 years in the future. After that, for sake of simplicity, all companies are assumed to survive, so all further survival rates are constant, and equal to the 10th.
As of 2018, the most recent recorded survival rates of Italian companies are:
76.10% (76.10% of companies founded in 2018 are expected to survive until the end 2019)
62.22% (62.22% of companies founded in 2018 are expected to survive until the end 2020)
52.57% (52.57% of companies founded in 2018 are expected to survive until the end 2021)
According to the curve fitting with those three data points, the following years’ survival rates are:
100% Survival Rates?
For older companies, survival rates may appear to be 100% for each year in the report. This does NOT mean that we do not imply a risk of failure. In this case, the risk of failure is comparable to other mature companies and, thus, it is taken into account in the main Discount rate of the DCF Methods (the Cost of Equity).
Remove Survival Rates
Traditional DCF does not use survival rates as an additional discount. If you are interested in mimicking on Equidam the same process, here is how to do it:
Set all survival rates to 100% in the Advanced Settings tab
Adjust the parameters of the Cost of Equity or adjust the WACC Premium to account for the change