Valuation Help

Business Performance Analysis

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Help for the Business Performance Analysis Valuation Module.

The Valuation Module is designed to provide an economical, efficient and effective means to assess the value of a business.

This Help file outlines the relationships and calculations applied for each item. The ? after an item links directly to the items Help.

Calculation formula are provided for reference and to enable an in-depth understanding of the underlying calculations applied in the forecast. Valuation can be completed without reference to the formula applied.




The Valuation Module applies the Forecast Analysis to generate a Business Valuation. The valuation is determined by the average Business Return (profit) over the forecast period and Required Return on Investment.

Sensitivity Analysis provides Optimistic, Expected and Pessimistic business valuations. The Expected Valuation reflects the valuation for the most likely (Expected) return. Purchasing the business for an amount equal to the Expected Valuation provides an average Return on Investment equal to the Required Return %.




These are Module specific Controls. They appear as click-able links below the Analysis Menu.


This Control prints the current window.

You can also use the browsers Print and Print Preview functions to set print variables. To do this from your browser tool bar go File, Print or File, Print Preview.




Business Return as calculated in the Forecast is provided for each Sensitivity (Optimistic, Expected and Pessimistic), for the Current Year, each Forecast Year and the Average of the Forecast Years.

It is a true indicator of the return an investment in the business will provide.

As outlined in Forecast Help ...

Business Return reflects the before tax annual long term return of the business. It considers asset re-investment and any Owners external income forsaken. It is is calculated as the Profit/Surplus less the Depreciation Allowance and less Owners External Earning Power.

Business Return = Profit/Surplus - Depreciation - Owners Earning Power




Optimistic Business Return is the Business Return where Relative Indicator values are adjusted by the Sensitivity % to improve the Forecast. It can be considered the best case scenario.

The % Return on Investment is based on the Applied Valuation, by default this is the Expected Valuation. This is the percentage the return the business provides for an investment (purchase price) equal to the Applied Valuation.




Expected Business Return is the Business Return where Relative Indicator values not adjusted by the Sensitivity %. It can be considered the most likely or average scenario.

The % Return on Investment is based on the Applied Valuation, by default this is the Expected Valuation. This is the percentage the return the business provides for an investment (purchase price) equal to the Applied Valuation.




Pessimistic Business Return is the Business Return where Relative Indicator values are adjusted by the Sensitivity % to degrade the Forecast. It can be considered the worst case scenario.

The % Return on Investment is based on the Applied Valuation, by default this is the Expected Valuation. This is the percentage the return the business provides for an investment (purchase price) equal to the Applied Valuation.




The Valuation is based on the Business Return and the Required Return % to determine a business valuation.




Optimistic Valuation is the value of the business based on the Average Optimistic Return divided by the Required Return %. It is the value of the business that provides the Required Return % when the Optimistic Business Return is achieved.

Optimistic Valuation = Average Optimistic Return / (Required Return % / 100)

The Average Optimistic Return is the average of Forecast Years only, it does not include the Current Year.




Expected Valuation is the value of the business based on the Average Expected Return divided by the Required Return %. It is the value of the business that provides the Required Return % when the Expected Business Return is achieved.

Expected Valuation = Average Expected Return / (Required Return % / 100)

The Average Expected Return is the average of Forecast Years only, it does not include the Current Year.




Pessimistic Valuation is the value of the business based on the Average Pessimistic Return divided by the Required Return %. It is the value of the business that provides the Required Return % when the Pessimistic Business Return is achieved.

Pessimistic Valuation = Average Pessimistic Return / (Required Return % / 100)

The Average Pessimistic Return is the average of Forecast Years only, it does not include the Current Year.




Applied Valuation is the valuation currently used in the % Return on Investment calculations for the Business Return and the Variance to Valuation calculations for the Net Present Value.

The Applied Valuation can be changed to review the impact on the Return on Investment. This effectively provides a reverse valuation where the Return on Investment can be determined for a set asking price.

The default Applied Valuation value is the Expected Valuation.




This is a click-able Control. When clicked Reset for the Applied Valuation returns the Applied Valuation value to the default value which is the Expected Valuation.




Net Present Value analysis is not required for Business Valuation. It is provided as an additional supporting methodology.

Net Present Value is the sum of current and future cash flows, where future cash flows are discounted to equivalent present values. It allows financial calculations relating to future events to be considered in present value terms allowing the cost of money, inflation, or opportunity cost to be factored into a financial calculation. This is done by discounting future cash flows to reflect that a dollar received today maybe worth more than a dollar received in a years time.

The longer the future time frame being considered the greater the importance of Net Present Value. For a time frame of 3 years it may provide little additional benefit, as the time frame increases it may become increasingly relevant.

However applying Net Present Value increases the complexity of calculations and tends to make them less intuitive. Therefore base valuations are calculated using the average forecast returns without discounting future cash flows.

From a valuation perspective Net Present Value is the sum of cash flows over the forecast period. This includes the price paid for the business as a negative cash flow (ie the Applied Valuation) and the future cash flows generated by the business (ie the Business Return for each Forecast Year) discounted to equivalent present values, and the potential value of the business at the end of the period.

If the Net Present Value is greater than 0 the investment return exceeds the discount rate (Applied NPV %) and it is a cash positive investment.

If the Net Present Value is equal to 0 the investment return matches the discount rate (Applied NPV %) and it is a cash neutral investment.

If the Net Present Value is less than 0 the investment return exceeds the discount rate (Applied NPV %) and it is a cash negative investment.

For additional detail see Net Present Value at Wikipedia.




Optimistic Net Present Value is the sum of the Applied Valuation (outgoing), the Net Present Value of the Optimistic Business Returns for each forecast year discounted by the Applied NPV %, and the future sale price discounted by the Applied NPV %.

The % Variance to Valuation is the Optimistic Net Present Value expressed as a percentage of the Applied Valuation.

Optimistic Net Present Value = - Applied Valuation + Sum of each Forecast Year [Optimistic Business Return / (1 + Applied NPV %) ^ Year] + Future Sale Price / (1 + Applied NPV %) ^ Year

The Future Sale Price is based on the the Optimistic Business Return of the Last Forecast Year and the Required Return %. Mouse over the calculated Net Present Value to display the Future Sale Price and the Future Sale Price Present Value (future sale price discounted by the Applied NPV %).

Future Sale Price = Optimistic Business Return of the Last Forecast Year / (Required Return %/100)




Expected Net Present Value is the sum of the Applied Valuation (outgoing), the Net Present Value of the Expected Business Returns for each forecast year discounted by the Applied NPV %, and the future sale price discounted by the Applied NPV %.

The % Variance to Valuation is the Expected Net Present Value expressed as a percentage of the Applied Valuation.

Expected Net Present Value = - Applied Valuation + Sum of each Forecast Year [Expected Business Return / (1 + Applied NPV %) ^ Year] + Future Sale Price / (1 + Applied NPV %) ^ Year

The Future Sale Price is based on the the Expected Business Return of the Last Forecast Year and the Required Return %. Mouse over the calculated Net Present Value to display the Future Sale Price and the Future Sale Price Present Value (future sale price discounted by the Applied NPV %).


Future Sale Price = Expected Business Return of the Last Forecast Year / (Required Return %/100)




Pessimistic Net Present Value is the sum of the Applied Valuation (outgoing), the Net Present Value of the Pessimistic Business Returns for each forecast year discounted by the Applied NPV %, and the future sale price discounted by the Applied NPV %.

The % Variance to Valuation is the Pessimistic Net Present Value expressed as a percentage of the Applied Valuation.

Pessimistic Net Present Value = - Applied Valuation + Sum of each Forecast Year [Pessimistic Business Return / (1 + Applied NPV %) ^ Year] + Future Sale Price / (1 + Applied NPV %) ^ Year

The Future Sale Price is based on the the Pessimistic Business Return of the Last Forecast Year and the Required Return %. Mouse over the calculated Net Present Value to display the Future Sale Price and the Future Sale Price Present Value (future sale price discounted by the Applied NPV %).

Future Sale Price = Pessimistic Business Return of the Last Forecast Year / (Required Return %/100)




Applied NPV % is the NPV Discount Rate % currently used in the Net Present Value calculations. It has no relationship to the Valuation calculations.

The Applied NPV % can changed to review the impact on the Net Present Value calculations. This allows the Discount Rate to be adjusted to reflect a range of alternatives such as inflation, the cost of money, opportunity cost, or risk coverage.

The default Applied NPV % value is the Required Return %.

The value of the Required Return % would normally reflect the opportunity cost or risk coverage for an investment.




This is a click-able Control. When clicked Reset for the Applied NPV % returns the Applied NPV % value to the default value which is the Required Return %.




This is a click-able Control. When clicked 0 NPV % adjusts the Applied Valuation to a value resulting in an Expected Net Present Value of 0.



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