How Forecasts and Projections Influence Business Valuation in Disputes

Executive Summary

Forecasts and projections often become the focal point in business valuation disputes because they shape the forward-looking earnings or cash flows that drive value—especially under income-based methods.

In litigation, the question is rarely whether projections can be used. The question is whether the projections were created in the ordinary course of business, whether the assumptions are consistent with the company’s historical performance and market conditions, and whether the valuation method applies those projections transparently and consistently.

This article explains when projections matter most in disputes, how accepted valuation frameworks incorporate forecasts, what documents typically support (or undermine) projected results, and the common errors opposing experts target—along with practical rebuttal strategies.

When This Issue Arises

Projection-driven valuation disputes commonly arise in:

• shareholder exits, buyouts, and partner/member disputes where parties disagree on future earnings potential;

• divorce and other family-law matters when a closely held business is a material marital asset;

• M&A disputes involving earnouts, purchase price adjustments, or post-closing performance claims; and

• tax or regulatory disputes where projected performance materially affects value assumptions.

Across these contexts, projections tend to carry more weight when they were prepared before the dispute and tied to contemporaneous business planning (budgets, board materials, lender packages, and operational KPIs).

Accepted Methods / Frameworks

Projection-based valuation most commonly appears under the income approach, and particularly within the Discounted Cash Flow (DCF) method. Projections can also inform market approach inputs (for example, selecting or adjusting multiples), but the DCF is the clearest path from forecast assumptions to value.

**Capitalization of earnings vs. DCF.** A capitalization method converts a single period’s expected earnings into value using a capitalization rate and is generally best suited to stable businesses with relatively steady performance. A DCF is typically better suited when meaningful changes are expected—rapid growth or contraction, new contracts, customer losses, major pricing shifts, new locations, product launches, or significant planned capital investment.

**Where projections affect a DCF.** In a typical DCF, projections affect (1) annual free cash flows during the explicit forecast period, (2) the terminal value (which can represent a substantial portion of total value), and (3) working capital and capital expenditure assumptions that determine how much cash is actually available to owners.

Numeric example: simplified DCF walkthrough (illustrative)

Assumptions:

• Year 1 free cash flow (FCF): $135,000

• Annual growth for Years 1–5: 5%

• Discount rate: 15%

• Long-term growth after Year 5: 3%

Step 1 — Project annual cash flows (Years 1–5):

• Year 1: $135,000

• Year 2: $141,750

• Year 3: $148,838

• Year 4: $156,279

• Year 5: $164,093

Step 2 — Discount projected cash flows to present value (PV) at 15%:

• PV(Year 1) ≈ $117,391

• PV(Year 2) ≈ $107,183

• PV(Year 3) ≈ $97,863

• PV(Year 4) ≈ $89,353

• PV(Year 5) ≈ $81,583

• Sum of PVs (Years 1–5) ≈ $493,374

Step 3 — Compute terminal value at the end of Year 5:

• Terminal value = Year 5 FCF × (1 + long-term growth) ÷ (discount rate − long-term growth)

• Terminal value ≈ $164,093 × 1.03 ÷ (0.15 − 0.03) ≈ $1,408,468

• PV of terminal value ≈ $1,408,468 ÷ 1.15^5 ≈ $700,257

Indicative enterprise value ≈ $493,374 + $700,257 = $1,193,631.

Key takeaway: small changes to a growth assumption, discount rate, or terminal assumptions can materially change the value conclusion—so the assumptions must be supported and stress-tested.

Documents & Data Checklist

To support (or challenge) projection-driven valuations, parties typically need:

• Historical financial statements (ideally 3–5 years) and year-to-date results, with consistent classifications over time;

• Budget-to-actual reports and prior forecasts (to test management’s historical forecasting accuracy);

• Forecast models, assumptions, and source files (including versions and dates created);

• Revenue support (customer contracts, backlog, pipeline reports, renewal rates, churn, pricing schedules, and capacity constraints);

• Margin and cost drivers (labor plans, vendor pricing, lease terms, inflation assumptions, and any planned headcount changes);

• Working capital detail (AR aging, inventory levels/turns, AP aging, seasonality, and operating cycle timing);

• Capital expenditure (CapEx) plans and fixed-asset replacement requirements;

• Debt schedules and covenant constraints that may restrict distributions, CapEx, or growth;

• Board/manager meeting materials and strategic plans supporting expansion or risk mitigation;

• Industry benchmarks and market data used to test reasonableness (growth, margins, and competitive conditions).

Common Pitfalls + Rebuttal Strategies

Pitfall 1: Projections that are disconnected from history. If projected growth and margins are materially higher than historical results without a documented driver, the projection may be treated as advocacy rather than planning.

Rebuttal strategy: compare projections to historical trends, budget-to-actual outcomes, and contemporaneous business plans; isolate the assumption(s) that create the value gap.

Pitfall 2: Litigation-created projections presented as “management forecasts.” Projections created after a dispute arises can be vulnerable if they are not consistent with ordinary-course planning materials.

Rebuttal strategy: request prior versions, timestamps, and the internal circulation history; compare to lender packages, board decks, and operational KPI dashboards.

Pitfall 3: Treating working capital and CapEx as an afterthought. Valuations can be overstated if projected growth does not require additional receivables, inventory, staffing, or reinvestment.

Rebuttal strategy: tie working capital assumptions to the company’s operating cycle and show whether working capital expands with revenue; test CapEx against capacity and maintenance needs.

Pitfall 4: Terminal value dominates the conclusion without support. If terminal assumptions are optimistic or inconsistent with long-term economic realities, the result can be skewed.

Rebuttal strategy: run sensitivities on terminal growth and discount rate; compare implied terminal margins and growth to industry conditions and the company’s competitive position.

Pitfall 5: Discount rate games or mismatched risk logic. Changes to the discount rate can be used to offset aggressive projections (or vice versa) without a coherent risk narrative.

Rebuttal strategy: require transparent build-up of the discount rate and demonstrate consistency between the risk profile reflected in projections and the risk reflected in the discount rate.

Pitfall 6: Overstating certainty. Projections are inherently uncertain; presenting a single-point forecast as inevitable invites credibility issues.

Rebuttal strategy: use scenario analysis (base, downside, upside) and show why the selected scenario is the most supportable given the record.

FAQ

How do projections affect business valuation in litigation?

They influence forward-looking earnings or cash flows used in valuation models, especially DCF analyses. The value outcome often changes materially when projection assumptions change.

What makes a forecast reliable enough to use in a valuation?

Reliability improves when forecasts were prepared before the dispute, match historical performance and market conditions, and are supported by documented assumptions, contracts, and operational constraints.

Is a discounted cash flow (DCF) always required when projections exist?

No. Stable businesses may be valued using capitalization methods or market approaches, but projections are most directly incorporated through a DCF when future performance is expected to change meaningfully.

How should working capital be handled in projection-based valuations?

Working capital should typically expand or contract in a way that matches the company’s operating cycle and revenue assumptions. Treating working capital as “free” can overstate cash flows.

What are the most common weaknesses opposing experts target in projections?

They often target unsupported growth and margin assumptions, forecasts created for litigation, missing working capital/CapEx needs, and inconsistencies between projections and contemporaneous business documents.

What documents best support (or undermine) projections in court?

Budget-to-actual reports, prior forecast versions, board materials, lender packages, customer contracts, pipeline/backlog data, and detailed working capital schedules are often the most persuasive.

Sources

• AICPA — Statement on Standards for Valuation Services (VS Section 100 / SSVS)

• IRS — Revenue Ruling 59-60 (valuation factors and fair market value framework)

• International Glossary of Business Valuation Terms

• Pratt, Shannon P., et al. — Valuing a Business (income and market approach frameworks)

CTA + Disclaimer

Contact the team at Joey Friedman CPA PA to discuss your business valuation needs.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.