Projections: The Dirty Little Secret of Business Valuation

Forecasting is not only a useful tool for business owners to develop business strategies and make operational decisions, but it is also a key component of the business valuation process.

While all business owners wish that they had a crystal ball to reveal the future, historical data is what is available, and it may or may not be indicative of the future. According to Jim Hitchner, a well-known business valuation expert and managing director of Financial Valuation Advisors, “Projections are valuation’s dirty little secret.”  Even the smallest change to a key underlying assumption in a company’s forecast can have a significant impact on the resulting fair market value. 

Those preparing projected financial information should be mindful of the potential for bias when determining key assumptions and expectations. Important questions to consider when preparing forecasts include: 

  • Do the key underlying assumptions used appear reasonable when compared to historical performance?
  • Are the forecasts consistent with historical performance? If not, why?
  • How do the forecasts compare to the economic and overall industry expectations?
  • Do the forecasts correspond to internally prepared budgets?
  • How do previously prepared forecasts compare against actual results?

Both the qualitative and quantitative drivers of any significant changes expected in future performance should be thoroughly understood and documented. As business valuation experts, we apply an appropriate level of professional skepticism when working with business owners and management to assess and substantiate forecasts that are to be used in our valuation models. The more reliable the forecasts, the stronger and more supportable the valuation conclusion will be.

Schneider Downs has extensive experience performing business valuations and analyzing sales, earnings and cash flow forecasts for its clients. Please contact Steve Thimons (412-697-5281) or Joel Rosenthal (412-697-5387) to ask a question or discuss Schneider Downs’ various business valuation services.

 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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