Financial Projections: Ensuring the PitchBook is Pitch-Perfect

I had a drawn-out phone conversation the other day with a potential business buyer who was up-in-arms about the financial projections.

“They’re much too high given historical growth,” he said.

I went on to explain that they were projections and subject to the assumption included in the report, including industry growth trends, synergistic fit within a larger organization and the potential addition of new salespeople. I also explained that any valuation placed on the business prior to deal closure would be based on the trailing twelve months of EBITDA. He still had his panties in a wad about the projections, which was a bit frustrating. Here are a couple of notes about the projections and how to create them so that they meet the needs of everyone involved. In most cases, you’ll never fully be able to please everyone, but getting close is the next best thing.

  1. Being Realistic. Projections are based on assumptions, but we’ve had some sellers come in and add ridiculous financial projections to the mix. The seller was looking to boost the business’s potential in the eyes of buyers. Unfortunately for them, most of today’s buyers are the most sophisticated men/women at the negotiating table and see right through the smoke and mirrors of projections gone afoul.
  2. Pumping the Numbers. It’s okay to do a little number inflating. The Pitchbook is a marketing piece after all. In doing so, it’s important to understand the difference between boosting the numbers and getting into fairy-dust territory. If it looks and sounds like a rate, buyers will be able to tell.
  3. Historical is a Good Benchmark. If last year’s YOY EBITDA growth was 12%, then the financial projections shouldn’t be 24%. You don’t get to have too many years where growth is that rapid before the business literally takes over all other businesses on the planet. Reasonableness in projecting the numbers can be seen in how the future compares to the past.

Connecting the Buyer with the Seller

It’s in the seller’s best interest to back-up the highest possible growth numbers imaginable in any projections presented. On the flip side, the buyer will come in on the opposite side of the table, almost betting the business will eventually fail miserably. Ultimately, the projections are just a method used for promotion, showcasing potential and presentation of a best-case scenario for the business. Buyers should know that. I think I may have just been a little annoyed that this buyer didn’t understand the projections were based on stated assumptions that may or may not be accurate given the right scenario.

Like the business itself–or even the analysts predicting the performance of public companies–the projections presented in private business Pitchbooks will likely be flawed to some degree. Getting it “just right” I dare say may be quite impossible, but hopefully the buyer sees a diamond-in-the-rough they can use to further expand their existing operations. Time and history will only tell.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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