Live NACVA Report: Add sensitivity analysis to your worksheets

Samuel Weaver recommends taking advantage of more of the risk analysis tools available to business appraisers…even if they’re simply little-used functions in Excel.

For instance, while speaking to a room of over 200 NACVA members today in San Diego, Weaver asked how many routinely use sensitivity analysis in their DCF’s.   About 15% of the room raised their hands, even though the simple function under data and then “What If Analysis” and then "Tables" in Excel 2007 can “do this in five minutes."

“Data tables can quickly be created on any cell—COGS, NPV, growth rate,” says Weaver.  They give you a range. It’s a model like Monte Carlo analyses which creates a range of solutions that looks like a roulette wheel if displayed graphically (“They didn’t want to call this method the ‘Atlantic City’ analysis, even though they also have roulette wheels,” joked Weaver.)

You can enhance sensitivity analysis on things like cost of capital by adding probability per cents to ranges of most likely assumptions. “You won’t do well in court if you go in and say ‘the value is between negative $8 million and $20 million,” Weaver says. “But, this range of outcomes may be very helpful to owners trying to make business decisions.” Illustrating the range and likelihood of outcomes can steer senior management as they assess outcomes—and particularly risks.

“Crystal Ball, @ RISK, and other tools can really help add value for your clients,” Weaver said, talking about tools he uses.