For Valuation Purposes
July 2025
The discounted future earnings/net cash flow methodology used to value a business is, if done correctly, the most accurate methodology to value a business, especially when historical financial performance doesn’t reflect future performance. This methodology is essentially the projection of net earnings or net cash flow into the future and the discounting of the result to present value at a discount rate that reflects the risk of achieving the projected net earnings or net cash flow. Obviously, developing a reasonable financial projection is a key factor in using this methodology to develop a reasonable value for a business. We have all heard the saying “garbage in - garbage out”. This saying is especially true with respect to valuing a business via financial projections. If the projections aren’t reasonable then the resulting value won’t be reasonable.
When developing financial projections for the purpose of valuing a business all relevant factors must be taken into account, both internal and external factors. Internal factors include historical financial performance, anticipated capital expenditures and working capital needs. External factors include the overall economic outlook, the industry outlook, competition, laws and regulations. Although financial projections necessarily require some subjective judgment, care should be taken to make the projections as objective as possible. A good practice is to go through each category of the business’ projected profit & loss statement and document the assumptions and reasoning for concluding that projection. If the assumptions and reasoning for each category are reasonable, the overall projection will also be reasonable. Lastly, one should look at the overall projection to see if it passes the “common sense” test. Are the projected revenues achievable given the projected levels of projected expense and capital expenditures? Will the level of competition allow the business to achieve the projections? Or will competitors respond in a way that limits anticipated growth?
Overall, each business is different and subject to many factors that affect future net earnings and cash flow. Assessing the effect of these factors is fairly subjective but projections can be reasonable if the underlying assumptions and reasoning are reasonable.
Relevant Court Cases
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Joann Kouba v. Thomas and Cindy Degner,
The Court of Appeals of Iowa,
No.24-0609,
filed July 2, 2025
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Pierce v. Commissioner,
U.S. Tax Court,
T.C. Memo. 2025-29,
filed April 7, 2025
Recent Business Valuation Articles
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“Why the P/E Ratio Becomes Irrelevant
in the Valuation of High-Growth
Stocks: Insights from the Potential
Payback Period,”
by Rainsy Sam,
dated June 18, 2025
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“Earnings versus Cash Flows in Equity
Valuation: Evidence from the
COVID-19 Crisis,”
by Jeong-Bon Kim, Junwoo Kim and Jay Junghun Lee,
dated July, 2025
Recent Engagements
- Valuation of a limited partnership
interest in a mostly real estate
holding partnership on a minority
interest basis for estate
tax/income reporting purposes.
- Valuation of the common stock
of a general contracting company
on a closely-held minority
interest basis, a freely-traded
minority interest basis and a
controlling interest basis, for
compensation and planning purposes.
- Valuation of a member
interest of an investment
holding company on a minority
interest basis for gift tax
reporting purposes.
- Valuation of the common
stock of a mostly real
estate investment company
on a controlling interest
basis for estate tax
reporting purposes.
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