Notes on Financial Forecasting and Business Valuation

Companies create multi-year financial forecasts usually for two reasons. First, they may be required to do so by their bank. Second, and more importantly, they create forecasts to assist ownership in establishing long-term financial goals and objectives; and to evaluate the adequacy of their financial resources to accomplish their plans.

In order to create a valuation analysis on this site, you must first create a multi-year forecast of the company of interest. This is the case because valuation analyses of various types are based, to a great extent, on a company's multi-year financial forecast and, specifically, on three important items:

• The investor's (e.g., existing owner, potential acquirer, or new investor) estimate of the company's future EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization);

• The price the investor is willing to pay for that EBITDA (i.e., the EBITDA multiple), and

• The capital structure employed by the company (as reflected on its balance sheet) to conduct its future operations.

The valuations analyses are tailored to accommodate various types of ownership interests:

• LBO valuation - estimates the current value of the majority ownership interest in non-public company.

• Private equity placement valuation - estimates the current value of a newly issued minority ownership interest in a non-public company.

• Public company valuation - estimates the current intrinsic value per share of a public company's common shares outstanding.

Our valuation models use five-year financial forecasts as their base:

• Two of the valuation models (the LBO Valuation Model and the Private Equity Placement Model) incorporate portions of the already-created financial forecast; and revise the future capital structure of the company to suit the nature of the analysis.

  • The LBO model revises the entire liability and equity sections of the balance sheet to reflect the typical acquisition funding of a financial buyer.

  • The Private Equity Placement model revises the equity section of the balance sheet to reflect the infusion of various types of new equity capital.

• Because investing in the shares of a publicly traded company usually has no immediate impact on the capital structure of the public company, the Public Company Analysis Model uses the financial forecast created by the user, in its entirety, as the basis for estimating the current intrinsic value per share of the public company's common shares outstanding.