While valuation ranges can have some degree of subjectivity and interpretation, we believe that honesty and transparency in how we arrived at your valuation is critical.
In some cases where there are outliers in recent performance, the range of the number may be much wider than you would expect - but for a good reason. Let's go through a couple of examples where this can happen:
1. Recent performance has dipped relative to past performance
- The business is coming off a "down" year or two
- Past performance was consistent and stronger
Outcome:
In this case, your range may be wide because the recent performance could be an outlier, or might be the start of a trend. Without knowing what the norm will be moving forward, the valuation range will be wider until such time that future data is available to indicate whether the “outlier” year(s) were, in fact, outliers.
2. Recent performance has improved dramatically relative to past performance
- The business has improved (perhaps dramatically) over the last fiscal year or two
- Past performance was relatively consistent and this improvement may or may not be part of a positive trend
Outcome:
Similar to the example above, the increased performance might be an outlier, or might be the start of a trend. Without knowing what the norm will be moving forward, the valuation range will be wider until such time that future data is available to indicate whether the increase in performance is sustained.
3. There is one year (in the last 5) that stands out relative to the rest
- The business had an outlier year (either positive or negative) in the last 5 years
- It is dramatic and noticeable, but clearly not indicative of any sort of trend
Outcome:
While less common, this scenario can also result in a wider range. Some valuation theories elect to discard the outlier year to arrive at a more conservative and tighter valuation range. However, our platform is designed to help business owners know and grow the value of their business through education and awareness so that they can make strategic decisions about their future. In this example, providing a smaller range, although possible and defensible, would not be as valuable to the business owner. In this specific example, the outlier year may or may not be relevant, depending on the usage of the valuation.
For example, if a business owner were selling their business, a buyer would undoubtedly zero in on the outlier year as a way to justify a lower price point. Therefore, the lower end of the range would be argued. In the same scenario, the business owner could justifiably argue that the outlier year should be thrown out of the calculations and would argue the higher end of the valuation range.
Over time, as the business either proves out that the year was (or was not) an anomaly, the valuation range will become smaller and be more reflective of the true value of the business. However, given the current data available, the wider range is an accurate indication of the potential value of the business.