Do’s & Don’ts with Forecasting to Determine Valuations

Do’s & Don’ts with Forecasting to Determine Valuations

Shoot the Moon
Shoot the Moon
Do's & Don'ts with Forecasting to Determine Valuations

We are often faced with the overwhelming influence from sellers to put aggressive weighting on financial forecasting when it comes to determining valuations. The reality is that while forecasting has a significant impact in determining valuations it doesn’t always have a positive impact.

Points we discuss in this episode:

  • Forward-looking performance of the company can be incorporated into earnout type structures
  • Forecasts can shed light on new business lines maturing and becoming a more meaningful part of the financial picture
  • Forecasts provide buyers with the information they need to make assumptions on a combined businesses performance
  • Forecasts that are in line with historical performance are more likely to be weighted vs those with major spikes in performance
  • Forecasts containing major reductions in OpEx to achieve a new degree of EBITDA need clear understanding and in many cases require some historical proof points to be considered in valuations.
  • Forecasts with major upward shifts in revenue without any historical performance to support the improvement will almost certainly be discounted
  • Forecasts are an important part of valuations when the combination currency is stock/equity.  Mergers and acquisitions that are funded by stock almost always allow for a more aggressive valuation based on future performance

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