What Growth Rate in the Forecast Period Can Teach About the Professionalism of the Valuation Report?
Did you know you can learn about the professionalism of the valuation report from the growth rate?
Valuations according to the DCF method include two forecast periods - the first period is the forecast period and the second period is the period beyond the forecast period. The forecast period lasts several years, usually between 5 and 10 years. During this period, the appraiser should estimate the growth rate of the business. In the second period - the assumption in the DCF method is that the growth rate will be equal to the long-term growth rate of the economy in which the country operates.
Many valuers do not spend the effort required to estimate the reasonable growth rate of a business during the forecast period.
The growth rate during the forecast period can teach about the professionalism of the appraiser.
We will show this simply:
Suppose we have to estimate the value of a gym operating in a small municipality, of 10,000 residents. Suppose today the number of subscribers in the gym is 200.
Most appraisers estimate the top-down growth rate, assume a certain growth rate, and build a forecast for revenue without examining the implications in depth.
you can learn about the professionalism of the valuation report from the growth rate
For example - suppose the appraiser uses a 20% growth rate per year.
This means that at the end of the first year the gym will have 240 subscribers, at the end of the second year - 288 subscribers, and at the end of the fifth year - 498 subscribers.
They use this number without examining whether the number makes sense.
The correct way to estimate the growth rate would be quite the opposite - in the first stage to estimate the growth rate - the evaluator must examine among the residents of the town - who can be a subscriber in the gym?
Should he consider how many of the town’s population can not be subscribed? Such as babies, and some residents are interested in subscribing to a gym.
Suppose that in the end he found that only 1,000 people in the town could be subscribers.
Another parameter that he must consider is the growth rate of the town’s population. Is the annual growth rate 1% or 30%? In addition - he must examine how many competitors the estimated gym has - 1 or 5?
If in the end, the evaluator concludes that after 5 years there can be only 400 subscribers to the gym, then his first conclusion - regarding 498 subscribers makes little sense.
This simple analysis can teach how professional the appraiser is.
In the Equitest valuation platform, we have built a mechanism that will make it possible to make a simple assessment of the growth rate
