Growth and the smaller business
Growth in the levels of the returns from the business and the amount of risk associated with the business, are the two weighty imponderables in respect of business valuation. This article explores some of the factors involved in determining rates of growth.
The most intellectually robust form of valuation is the discounting of future cash flows, provided that the valuer is blessed with some relatively reliable forecasts.
When valuing a business using discounted cash flow techniques, there is clearly a need for management to make explicit assumptions with regards to the growth of the business in the years for which there are specific forecasts. These assumptions will include the anticipated inflation in revenues and costs and there is then a secondary assumption required, relating to growth in perpetuity. This is part of calculating the terminal value at the end of the period of discrete cash flow forecasting, using the Gordon Growth Model, also known as the dividend discount model (DDM).
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