How financial projections are used in business valuation

1.5 min read

Financial projections are an important part of the business valuation process, but they are not the only factor that a professional valuator will consider. A professional valuator will use a variety of methods and approaches to determine the value of your business, and the weight given to financial projections will depend on the specific circumstances of your business and the information that is available.

A professional valuator will typically use a combination of the following methods to value a business:

Market-based approach: This approach involves comparing the financial performance and characteristics of your business to those of similar businesses that have been recently sold or are currently for sale. This can provide insight into the value that the market is currently placing on businesses like yours.

Income-based approach: This approach involves projecting the future cash flows of the business and discounting them to their present value. This method is heavily dependent on the financial projections provided by the business owner or built by the valuator or business advisors.

Asset-based approach: This approach involves valuing the business based on the value of its tangible and intangible assets. This method may be useful if the business has a lot of tangible assets such as real estate or equipment.

Each of these methods has its own strengths and weaknesses, and the professional valuator will consider which method is most appropriate for the specific circumstances of your business.

It’s important to note that financial projections, while important, are not always accurate and may not reflect the true potential of the business. Other factors such as the business reputation, customer base, industry trends, and management team can also have a significant impact on the value of the business. A professional valuator will consider all relevant factors to provide an accurate and fair valuation of your business.

Contact us today to discuss the appropriate method and factors a professional business valuator will likely consider in valuing your business.