Earnings Assumptions: Common Errors

A business appraiser is confronted with many challenges with respect to
developing earnings forecasts for a closely held or family controlled enterprise. This process may be complicated by ungrounded earnings forecasts provided by the executive management of the company. However, the skilled business appraiser typically will probe the financial engineering of the company’s management, leading to a forecast that “makes sense.” The most common errors with respect to ungrounded earnings forecasts generally fall into two categories: inappropriate basis for the earnings forecast and unrealistic growth rate assumptions. Attempting to determine the appropriate growth rate for the company going forward, based only on historical data and management expectations, is one of the most difficult yet most important aspects of the valuation.


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