Management projections have always required thorough analysis. Now, though, it seems they often require outright skepticism. The same irrationality we’re seeing in the markets is affecting the projections we’re getting from our clients, Jeff Dunn of Capstone Valuation Services told appraisers last Friday at the American Society of Appraisers, New York City Chapter’s Seventeenth Annual Current Topics in Business Valuations 2009 Seminar.
It’s not just about overly optimistic projections now, either. At the other end of the spectrum, many are setting the bar intentionally low. Anxiety about capital availability has penalized the assumptions of capital-intensive businesses, Dunn said.
Event organizer, Scott Nammacher of Empire Valuation Consultants in New York City, agreed that appraisers might now need to RAISE projections to correct for management pessimism. Any DCF analysis requires an understanding of the cyclicality of the industry. Discount rates and debt-free cash flows—derived at this low point of the cycle—won’t make sense for a terminal value analysis that begins five years from now.
Dunn offered one suggestion to increase the reliability of management projections: “I used to ask for five year projections, but I now realize that [it] rarely gets you where you want to be. A better [approach] is to [obtain] a set of projections that gets us to a normalized future [and shows] what it will look like on a long-term sustainable basis.”
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