What is your favoured method of forecasting
October 11, 2021
by a professional from University of Pennsylvania - The Wharton School in Sydney NSW, Australia
Valuation practitioners make financial forecasts using various methods. What is your favoured method and why? Some common methods are:
1) Averages over last 3 to 5 years
2) Exponential smoothing
3) industry averages
from The College of New Jersey in La Verne, CA 91750, USA
^redacted is correct that forecasting can have limited applicability in certain investment cases. Small companies pose particular challenges in projecting growth outside of their immediate addressable markets (which can be confined to a specific geography). That being said, in having worked with many private equity firms and synergistic buyers on deals of various sizes, most will have a deal model that contains an expectation of cash flow in the future. Sometimes this is a sensitivity analysis to confirm that, in a base case scenario, the future cash flows provide an adequate return of investment capital within a reasonable time frame. In other cases, I've had clients build very complex and sophisticated deal models that project out anything from individual product growth rates and fixed vs. variable expenses to working capital and expected tax amortization benefit associated with the acquired intangible assets.
It really depends on the individual buyer at the end of the day and the size of the deal.
from The University of Chicago in Chicago, IL, USA