I gotta add a big "ditto" to the previous posters who advise against a reliance on an overly-simplistic rule-of-thumb multiple. Our lives would be easier if it were indeed that simple, but the reality is otherwise. A whole lotta businesses have traded hands in severely over- or under-priced deals, thanks to a misguided belief that "simple formulas are good enough".
You're definitely on the right scent, though, with your intuition that "free cash flow" is the key value-determinant. I like to allow for different risk levels in the cash flows, and here's a simple variant you can use or adapt in some way:
Slice the forecasted FCF into three layers: That portion that you feel is almost certain (the "slam dunk" layer); a second layer that's not as certain, but still reasonably attainable; and a third that has a significantly lower probability of occurence, but still possible under the right conditions. Then, give each layer its own multiple--higher for the "nearly certain" layer; lowest multiple for the "yeah, it'd be nice but don't count on it" layer.
That way, you're at least taking a stab at bringing the "uncertainty" factor into your pricing, and in so doing, your pricing model is one degree more sophisticated that the very simple 2X or 3X rule of thumb.
Quick example: I'm vetting a biz where the forecasted CFs are $100 a year. (Here's where it gets situation-specific.) My examination of the factors leading to that forecast might tell me that I should really think of it this way: I could get $65 of positive cash flow practically without trying. With reasonable effort, employee and customer retention, etc., another $30 per year on top of the $65 is do-able, but by no means a 'gimme'. Finally, I might be able to get the annual CFs up to $110, total, with a whole lotta work, and whole lotta luck. That gives me my third layer of $15.
Now, if the market tends to price low-risk, medium-risk, and hi-risk companies at, say, 6X, 3.5X, and 1.5X, respectively, then I might attach those same multiples to my three layers.
Not difficult at all, and at least you've moved one step up the ladder from the most base-line simple rule of thumb multiple (and hopefully tweaked the accuracy of your pricing a bit). When you consider how many dollars you might throw away my over-pricing, it's not a bad little exercise.
As a side note, I also really like Mr. Burton's suggestion that you "weight" the cash flows, giving the greatest weight to the most recent. It's another way of incorporating a better pricing of the uncertainty factor into your analysis. And Mr. Barrick is spot-on saying that your pricing absolutely should take into account any changes to the CFs that YOU can bring to the biz, post-acquisition. Excellent advice.
Best of luck,