Accountants come often under debate that they rely too much on historical data and information and this hinders their ability to have foresightedness to see future prospects of any business and individual. Considering business valuation models which have largely been used in the past few decades the reliance was too much on asset values, dividend growth, projected cash flows or share price however little consideration was given to various other factors such as technology adaptability, user acceptance, governance mechanism, compliance readiness, environment friendliness, any patent approvals, its uniqueness in the marketplace, social awareness or management capability. These situations lead to the dilemma of judgment whether these other factors should be given enough weightage in terms of assigning a reasonably justified value to a business whether a startup or established business.
A startup with healthy revenue projections in the short run but which is continuously losing its subscribers may not find itself into a lucrative position in front of business owners after few years or a startup with low revenue projections but with better visibility and brand recognition may keep the seller in a position of regret after few years as the seller could have got a better value for it from the buyer at the time of selling it.
Considering various cases where only revenue streams were considered to come up with assigning a monetary value to a business, it was found that the business was either undervalued by the seller or the projections made did not seem reliable. To avoid facing such issues, sellers and buyers are recommended to keep a scoring model or a checklist in place. This ensures that businesses are valued with a holistic approach, considering how they fit into the bigger picture and remain relevant to the real-world scenario of the marketplace. It should not merely be a mathematical or accounting model of business valuation.
By Syed Adeel ur Rahman