Effective modelling is an essential component of validating company valuations , especially in difficult fund-raising environments such as current market conditions. As such it is imperative that models are supported by accurate and timely internal and external data.
There are 4 main methods for creating believable and supported model assumptions. These methods can be used individually or in combination.
|Historical Financials / Track Record / Case Studies
|When there are historical operations – the support is reasonably straight forward unless it is expected that operations will change dramatically to achieve a higher valuation / better outcome. In the case of changing operations – it is also important to support the plans for them to achieve the highest valuation or best outcomes.
|Traction / Pipeline
|When there is traction, often demonstrated by a pipeline, the momentum should be well documented and translated into financial variables. For example, when revenues are expected to increase substantially it is best to have a robust pipeline which supports that increase in revenues. Read “How To Create a Pipeline: Pipeline is Not Revenue”
|Peer / Comparables Analysis
|When another company has achieved some or part of expected growth plans (even if their industry or operations are not the same but are comparable enough to be a relevant comparison). It is a good sign if another company has accomplished some aspect of a growth plan. The experience of the other company can help support growth assumptions and valuations.
|Economic Data / Research
|When there are major business drivers that are dependent upon macro-economic factors such as sector growth rates, inflation rates and currency fluctuations. For example, if model growth rates exceed relevant sector growth rates, it is possible for model revenues to eventually exceed the total sector value, which would not be realistic outcome, unless the model is assuming a change in sector growth. (which would then need to be supported).
No organization is “just a model” and there are many factors that drive business growth. However, those who capture the financial aspects of growth will have the best foundation for obtaining the highest valuation.