Other Takeaways:


  • Many involved in business transactions and appraisals avoid future projections and thus may render lower values for fear of litigation.
  • To assume a business will do the same as it did in the past is to assume the future.  Past performance must be analyzed by the appraiser and projected into the future. This look at the future gives the appraiser a view through the buyer's eyes, and that is what appraisal is all about.
  • Buyers will claim their future actions and success will stem from their hard work and they will not pay the seller for this. However, in reality, it is the seller that gave them the opportunity and the momentum to accomplish their perceived goals. 
  • If the appraiser cannot tell the future, then a buyer will not risk their money.  Therefore, they will want their money back very quickly requiring a higher capitalization rate or a lower multiple of earnings. That equates to a lower price.
  • Another reason for projected earnings is the moral obligation to the buyer. Assume research identifies the business lost its most profitable customer or that legislation was passed to adversely affect business performance.
  • Banks look at the company's financials and industry data to forecast what the company's ability to pay back a loan. If the bank forecasts the company will be able to service the debt, then the will approve the loan.
  • Temporary issues, e.g., the business suffered for a quarter due to construction in front of the business, may greatly impact past performance, but have a positive impact on future performance.
Conclusion:  To show projections to a buyer is potentially risky.  However, an appraisal is an opinion of value ordered by the seller. Your client is the seller and is paying for your opinion on the market value of their business. Prepare projections for the seller.