As you know, business valuation depends on a number of key assumptions. Most importantly, your income forecasts for the business influence your valuation results.
Your business plan may include a number of such forecasts. Typically, business people have a set of income and expense projections. Because there is no guarantee how the business will perform in the future, business owners make several projections that reflect possible outcomes. A
best case forecast may indicate how the business will do under ideal conditions. If the business conditions deteriorate, a
worst case forecast may be a closer fit. The objective here is to be prepared for such situations and prevent problems before they occur.
A standard way to value a business is to use income-based business valuation methods, such as the Discounted Cash Flow or Multiple of Discretionary Earnings. These methods rely on the income projections as their key input. Hence, their business value results will differ depending on which income forecast you use.
To see how your business value changes with each projection, you can use ValuAdder scenario analysis.
Here is how:
- Make your income and expense projections for each scenario, using the ValuAdder financial recasting worksheets.
- Select a business valuation method you wish to use, such as the Discounted Cash Flow.
- Create a Discounted Cash Flow Tab in ValuAdder for each scenario, e.g. Best Case, Worst Case, Most Likely Case.
- Use your income stream forecasts to calculate the business value for each scenario.
Now you can easily see how your business value changes based on each income forecast. Don’t forget to review the discount rate for each forecast scenario. If the business risk associated with each projection is different, your discount rates for each should reflect this.