Business Valuation Blog | Understanding Buying / Selling a Company

Valuing A Business With Aggressive Forecasted Revenue Projections

Posted by Business Valuation Specialists LLC on Oct 24, 2022 7:30:00 AM

Business Valuation Appraiser Forecasted Revenue Startup

Business appraisers typically gather a lot of historical financial data when working with their clients on valuation assignments. They review income statements and balance sheets while looking at the market and industry data that all help shape their conclusions. Going back five or more years is not uncommon, while at the same time discussing reasonable future expectations within the confines of the current company profile.

On occasion, however, an appraiser may engage with a new “startup” or a company that’s been in development for years with little to no income that projects a formidable 5-year forecast of significantly higher revenues. How should that appraiser approach the valuation effort without ignoring historic performance or the external data they usually rely on when looking at more traditional businesses?

The answer is largely dependent on the credibility of the forecasted revenues and their client’s underlying reasoning behind these estimated projections. Here are a few questions to ask both the client and yourself as you work through the analysis:

Is the business unique in any way to its competitors or to comparable businesses in the market?

If yes, then it makes sense to focus on those areas to support the projections that might otherwise appear unreasonable on the surface. If the answer is no, then use the available market to create some checks and balances with the forecasted figures.

Has there been any tangible infrastructure developed within the company that sets the stage for realistic expectations of the longer-term forecasted growth?

It is common with a 5-year forecasted projection to aggressively estimate much higher revenues in the latter half of this period. What has been accomplished today that might further enable the appraiser to agree the longer-term outlook is not overreaching?

What degree of hypothetical or extraordinary assumptions is being made to support the aggressive growth?

Is the client making one too many assumptions about the internal structure of the company or making future market predictions that just don’t add up to a reasonable expectation?

Overall, there will be additional challenges with these valuation projects where reliance on heavily forecasted projections far outweigh historic data. As an appraiser, don’t be afraid to question the client if you are not comfortable with the overall picture they are presenting. Have them provide a clear, sensible outline that supports the aggressive forecasts, and ensure you make statements in your report which show the level of reliance you put on the assumptions and conditions. After all, it is your work that will potentially be relied upon by other parties who may be investing in the future of your client’s company.

Tags: Business Valuation, Business Appraiser, future revenue, business forecast, startup company

Valuing a Rapidly Growing Business: Get the Most Out of Your Forecasts

Posted by Business Valuation Specialists LLC on Apr 26, 2021 8:00:00 AM

Business Valuation for Rapidly Growing Business

When you've worked hard to position your business for expansion, it's difficult dealing with the likelihood that not everyone sees the potential growth right now, when you most need them to. If you need to get more today for your business' future plans, you need partners who can help you obtain everything you can in today’s market.

Valuing a rapidly growing company is a challenge, but well worth the effort when it's time to consider a new investment, or possibly merging with another operation. The same can be said for those looking to invest in or even purchase the business.

There are several reasons you see the potential for rapid growth in your company. New market expansion, increased product and service demand, higher commodity prices, and changes in your operating efficiencies are just a few. Whatever the reason, your company is growing, and you want to take advantage now. Where do you go to make that happen?

A common, less effective way is to simply discount the value of that growth over a short-term, fixed future period, ultimately dictating a lower than expected business value thus, receiving less consideration than you should. On the flip side, you may overestimate the growth rate, and over-leverage your position as the value is not supported by realistic growth expectations.

The best option is to hire an experienced, certified appraiser to perform a company valuation. One who has experience in your industry and with growing markets in general. But what does that appraiser base the company's value on? Here are a few areas they typically consider:

  • Future Earnings: How much is the business forecast to earn over the next several years? If it's realistically and materially higher than in the past, it will be taken into consideration when determining current business value.
  • Market Conditions: Is the market booming, with many businesses within that sector seeing strong returns? If so, how long is this trend expected to continue? Much like the housing bubble and the dot-com crash, trends may change, though strong companies that are well managed through may expect to see a stronger market share in future upswings.
  • Innovation in the Industry: Is your business viewed as a leader in innovation or does it create the same basic products and services as every other company across the industry? If you have a history of innovation, it can be reasonably expected that your growing company will continue to see strong growth, supporting a higher value.
  • Goodwill and Reputation: Does your business have a reputation for excellence in the industry? A strong reputation can make a huge difference between reliance on one-off sales or loyal, committed customers who come back for your services and products time and again.

The work you've put into your business to prepare for expansion and take advantage of opportunities as they've arisen deserves to be recognized and rewarded, and valuing a growing company is a great way to substantiate that effort. A certified business appraisal conducted by an experienced valuation professional lets you take advantage of these future earnings, allowing you to benefit today from the forecasted plans.

Tags: Business Appraiser, business appraisal, valuation, certified appraisal, future revenue, business forecast