Your projections matter. Now.

Here’s a couple of valuation truisms every CFO should know.

1. Valuations are often highly reliant on the forward-looking projections of the client,
2. Valuation reports are undergoing scrutiny in the financial reporting realm as never before. The same will likely be said about the tax realm when the IRS finally takes off its gloves and starts prosecuting.
3. This scrutiny will likely go beyond valuation methodologies and standards of value, and looks through the report to the underlying assumptions that the report is built upon, namely the company’s projections.

Here’s a singularly important conclusion that you can draw from the above: your projections matter. I don’t care how young your company is, or how cloudy the crystal ball. If you don’t have the time, capability or inclination to build yourself a nice, tight financial model that looks forward 3 years or more, then hire someone to go do it for you (rather, with you).

Think of it again, from another perspective. If you begin by building out decent financial projections now, you will have a coherent story to tell the SEC or IRS when it comes time to justify your expectations and option pricing history. Because hindsight is 20/20, it may tempt those scrutinizing your books to employ revisionist history to your detriment. Can’t you imagine someone saying, “you must have seen this M&A exit coming. So why didn’t you build that into your exit assumptions? Why wasn't this reflected in your stock option price?” You can see where that line of thinking may lead. So keep your model fresh, keep good notes in the margins, be true to the facts of your situation, and above all else keep it realistic. Finally, keep a history of your work because you may need it later.

By the way, if you need a recommendation for a good analyst to help you craft a decent financial model, we’d be happy to make an introduction. It is often an arduous exercise so you had better deal with this now, before you engage your valuation provider. It’s that important.