Forecasting a companyโs future growth rate is an art rather than a science butโฆ
there are a few factors that can help educate assumptions regarding growth rates.
๐๐ถ๐ฟ๐๐, ๐๐ต๐ ๐ถ๐ ๐ด๐ฒ๐๐๐ถ๐ป๐ด ๐๐ต๐ถ๐ ๐ฟ๐ถ๐ด๐ต๐ ๐ถ๐บ๐ฝ๐ผ๐ฟ๐๐ฎ๐ป๐?
The top-line revenue growth assumption is one of the main drivers in valuing a business. Nearly everything else flows from there.
So itโs very important to be as thoughtful about this as follows.
Itโs tempting to believe the story that โthis one company is different because โฆ. โ.
But taking a more macro view helps develop a more objective and credible valuation.
There are always exceptions and nuances, but here are some factors that I often use to think through this assumption.
๐ญ) ๐๐๐ฟ๐ฟ๐ฒ๐ป๐ ๐ด๐ฟ๐ผ๐๐๐ต ๐ฟ๐ฎ๐๐ฒ:Past performance can be a predictor for future performance. A company that had, say 25% growth rate the past two years can be expected to grow faster than a business that has, say, only experienced 3% growth.
๐ฎ) ๐ฆ๐ถ๐๐ฒ ๐ผ๐ณ ๐๐ต๐ฒ ๐ฐ๐ผ๐บ๐ฝ๐ฎ๐ป๐:As a company becomes larger and larger, it becomes harder to acquire new customers at the same economics as it did earlier, so growth rates tend to come down.
๐ฏ) ๐ฆ๐๐ฟ๐๐ฐ๐๐๐ฟ๐ฎ๐น ๐ฎ๐ฑ๐๐ฎ๐ป๐๐ฎ๐ด๐ฒ๐:Evaluate the industryโs and companyโs strengths and weaknesses, and using a simple framework such as Michael Porterโs five forces analysis.
โ Competitonโ New market entrantsโ Substitutesโ Strength of suppliersโ Strength of customers
Even if the analysis is not rigorously based in data, using this framework helps ensure that we are not overlooking anything important.
๐ฐ) ๐๐ถ๐ณ๐ฒ๐ฐ๐๐ฐ๐น๐ฒ ๐ผ๐ณ ๐๐ต๐ฒ ๐ถ๐ป๐ฑ๐๐๐๐ฟ๐ ๐ฎ๐ป๐ฑ ๐ณ๐ถ๐ฟ๐บ:
Most firms and industries generally follow a growth cycleโฆ startup, growth, maturity and decline.
Benchmark where the specific company lies along this spectrum as a guideline for growth projections.