A useful valuation range makes its purpose, methods and sensitive assumptions visible.
01 · The picture
A useful valuation range makes its purpose, methods and sensitive assumptions visible.
Follow the decisions
01Purpose
02Suitable methods
03Sensitive assumptions
04Credible range
02 · The idea
How I understand it.
Begin by defining what is being valued, the purpose of the exercise and the perspective of the potential buyer or investor. Choose methods that fit the business and the information available. Comparisons with other businesses, expected future cash flows and asset values can each offer evidence, with different limitations. Record the assumptions that drive each result, including growth, margins, investment needs and risk. Change the influential assumptions to see how much the estimate moves. Differences between methods should prompt investigation into their inputs and relevance. Keep the value of the operating business and the value attributable to shareholders clear throughout the analysis. Present the resulting range with its conditions, giving the reader enough information to understand what would move it.
03 · A fictional example
Put it into a business.
Two buyers assess a maintenance company. One expects steady renewal income; the other expects faster growth through an existing sales team. Their estimates differ. The seller asks each to show retention, margin and investment assumptions, then tests lower renewal rates. The discussion becomes clearer because the parties can see which expectations account for the gap between their estimates.
04 · Bring it into the room
Which assumption has the greatest effect on the value you currently attach to the business?
One decisionOne next actionOne way to check
Where this note comes from
An original explanation drawn from my saved learning material. The worked example is fictional.
London Business SchoolCourse reading or session material