We talked about assumptions that underlie any business appraisal. Business valuation results differ mainly because the analysis relies on a different set of factors that drive business value.

Just how sensitive your business appraisal result is to changes in these assumptions in an important question. It is a good idea to show in your report how much the business value would change should a key assumption turn out differently than expected.

Take a look at any business appraisal and you will find quite a number of assumptions. Most center around future expectation in business sales, expenses, interest rates and taxes in addition to capital outlays and working capital requirements.

To account for how each of these parameters can affect the business value conclusion is not practical. However, you can state clearly how the various choices have been made and describe how changes in the top parameters can affect what the business is worth.

One way to do this in practice is to create several scenarios: best case, worst case and most likely case. Each is associated with a set of key assumptions that differ based on expected business outlook. You can determine the business value for each scenario and report your result either as a range of business values or an average number.

Credibility of your business valuation depends largely on how clearly and convincingly you describe the assumption set. Those reading your business valuation report can review these key parameters and make up their mind whether to accept the business valuation result.

Calculating Business Value

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