Fundamental to the business valuation process is the need to make assumptions about future events. What the business is worth today depends upon future cash flows. These future business earnings are a function of business future performance, financially and operationally.
Business value is about the future earnings and risk
No matter how you slice it, you need to take a leap of faith and make some critical assumptions about how things will turn out.
Do errors of judgement occur? Yes, indeed. How useful your business appraisal is depends in large part on how well you can foresee the future for the company.
Devil in details – business valuation depends on your assumptions
Both the business appraiser and business clients reading the valuation report must take ownership of the process here. As a business person, you should read the entire report, not just the business value conclusion section. Otherwise, you may miss important assumptions that qualify the valuation result. The body of the appraisal report should tell you how these assumptions have led to the business value number at the end. Equally importantly, you can spot how sensitive the valuation result is to the key value drivers your business appraiser has considered.
In business valuation, the assumptions drive the results. If the assumptions are seen as reasonable by the intended readers of the report, the conclusion should come as no surprise.
If, on the other hand, you find the business valuation conclusion troubling, go back to the assumptions made at the outset. If still in doubt, ask your appraiser to clarify the assumptions or run what-if scenarios under alternative expectations to assess their effect on business value.