For Those of Us Who Specialize in Fuzzy Thinking

One of the key concepts in business valuation is the somewhat vague notion that “value is the present worth of future benefits.” Another key concept is that the value of a business is “the price at which the property would change hands between a willing buyer and a willing seller.” So here we have two nice vague, fuzzy concepts upon which to build an entire profession. For those of us who specialize in fuzzy thinking, it’s perfect.

Tell Me About Your Future Benefits

Note that the “future benefits” idea doesn’t actually say anything about money. The benefits could be food, sex, security, shelter, status in the community, freedom, and so on. Quantifying these benefits in terms of cash dollars is what we try to do, but some of those benefits are not readily quantified. What is it worth to a person to have his community think of him as a successful businessman, for example? I’m not intending to answer that question here; I’m just pointing out that quantifying benefits can be an uncertain exercise, especially if you take into consideration that one man’s hot benefit may be another man’s pain-in-the-ass hassle.

In the valuation world, we tend to focus almost exclusively on cash benefits, although it’s obvious that non-cash benefits are often equally important.


If we are going to look at future benefits in dollar terms, financial projections are a requirement. It is possible to just rely on the subject company’s past performance, but this is saying we think the future will be just like the past. This is unlikely unless the rest of the world somehow remains constant.

With the exception of high tech companies, very few of our clients are able to provide much information about their expectations for future sales and profit. A few are able to give us the five-year income statement and balance sheet projections we always request. Some provide a one-year budget. Others will hazard a guess about next year’s sales. The fact is, they don’t know what the future holds. Whatever they project is bound to be inaccurate, and then someone is going to complain they didn’t meet their projections. Furthermore, it’s a chore to do a creditable job of preparing a projection, and they have a business to run.

When we do get projections, the owners’ current situation often has a huge effect on the forecast. For a business trying to raise investment capital, get a loan, or sell the business, the outlook is bright and they provide optimistic, wildly optimistic, or insanely optimistic projections. (So far, the best one was a company planning to go from $zero sales to $2 BILLION in one year.) Conversely, when there is a divorce or when a departing partner needs to be bought out, the projections are often dismal.

Almost no one does a good balance sheet projection, although in real life much of the variability in cash flow is the result of balance sheet changes. The effect of capital spending, borrowing, receivables and inventory management, tax liabilities, etc., can add up to a major hit to cash flow. And, in the end, it’s the cash flow that we use as our primary measure of future benefits.

Gaze Into My Crystal Ball

Frequently, we generate the projections we use in our valuations based on whatever forecast the client could provide and our analysis of their history, their balance sheet structure, and data we obtain from industry sources. The client gets a chance to review and accept or modify these projections, although there are seldom any substantive changes. In effect, we are foretelling their future.

I have two crystal balls on my desk. Unfortunately, neither one works perfectly or I would be on a beach somewhere.