Table 4-1: A Scenario-Based Approach to Valuation

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Table 4-1 A Scenario-Based Approach to
Valuation Step 1 Define the purpose for the
value assessment (e.g., seeking funding, buying a
company, investing in an established business).
Step 2 Pick a point in the future when you
expect your business strategy to deliver value
(most venture capitalists choose 3-5 years, but
you may wish to shorten the timeframe). Step 3
Analyze the business concept and strategy and
forecast market size, your share, and revenues.
Identify yearly changes that reflect how your
firm and the market would reach this future
state. List key assumptions used in constructing
revenue forecasts. Talk with others and adjust
assumptions. Step 4 Analyze the capabilities
and resources required to reach the future state
and forecast the cost of building those
capabilities and acquiring resources. Identify
yearly costs and resources that will be required
by you, your partners, suppliers and customers.
List key assumptions used in constructing cost
forecasts. Talk with others and adjust
assumptions. Step 5 Based on this analysis,
construct estimates of financial performance and
market value that reflect the "most likely"
assumptions. Clearly state the performance
drivers that form the foundation for the
assumptions in your model. Step 6 Factor in the
uncertainty in your assumptions by developing
several scenarios that represent upper and lower
bounds on key variables in your forecasts. Most
plans include scenarios that reflect the "most
realistic," "best case," and "worst case."
However, additional scenarios may be needed.
Test the sensitivity of your forecasts based on
changes in key assumptions. Step 7 When
appropriate, validate your model by using
alternative approaches, such as Discounted Cash
Flow and Comparable Company Analysis. Step 8
Discuss the value analysis scenarios you have
constructed with others and critique the findings
and assumptionsnot just oncebut on a regular
basis. Keep in mind that this analysis is based
on highly uncertain business judgments. As a
result, it is important to stay informed of what
is happening in the market and industry, your
company and with your community. Use the
analysis as a baseline and update it often based
on what you learn as you execute strategy and
conduct business. Finally, be sure to set up a
dynamic and broad-based measurement system that
collects real-time metrics of company and
industry performance. Source Applegate, Lynda
M., Robert D. Austin, and F. Warren McFarlan,
Corporate Information and Strategy Management.
Burr Ridge, IL McGraw-Hill/Irwin, 2002.