Case Study 1: Valuation of a High‐Growth Business

This chapter presents the valuation of a high-growth company with a focus on selecting forecast time horizon and calculating a terminal value (TV). Given the uncertainty in developing forecasts for a start-up or otherwise, a better approach for dealing with risk is to develop scenarios to represent a range of outcomes. Many analysts develop worst, base and upside cases. The effectiveness of this approach will depend on the audience. When valuing a high-growth business, one must extend the forecast horizon until the growth stabilizes. Typically, it means that top-line growth is the same or lower than the overall economy and new investment is at a maintenance level. Terminal value should be based on an internally consistent normalized cash flow and growth rate. When the range of potential outcomes is large, one must consider developing several scenarios to illustrate the impact, both positive and negative, on valuation.