How to test valuation assumptions: a practical beginner checklist
A valuation is an estimate under assumptions. A precise spreadsheet result can still depend on uncertain forecasts. Start with the business model, then test what must be true for the number to make sense.
One multiple, several assumptions
A fictional company has £4 million of EBITDA and is valued at 8× EBITDA. The implied enterprise value is £32 million. If net debt is £7 million and there are no other claims or adjustments, simplified equity value is £25 million. This is an authored teaching example; the multiple is not a current market benchmark.
Now suppose sustainable EBITDA is only £3 million because a temporary contract ends. At the same multiple, enterprise value becomes £24 million and equity value becomes £17 million. A 25% earnings reduction causes a 32% reduction in equity value in this example because net debt stays fixed.
Check earnings quality
Ask whether earnings include one-off gains, whether proposed adjustments are defensible and whether cash conversion supports the reported result. EBITDA excludes depreciation, interest and taxes, and does not deduct capital spending. It cannot on its own show the money available to investors.
Check comparability
Companies with different growth, margins, capital requirements and risks may deserve different multiples. Use consistent periods and earnings definitions. Do not mix a historical earnings measure for one business with an optimistic forecast for another without explaining the difference.
Build a downside case
- Change one operating assumption, such as sales volume or customer retention.
- Recalculate costs, earnings and cash flow rather than assuming every cost falls with sales.
- Review debt, interest payments and funding needs.
- Test a lower valuation multiple or a higher discount rate separately.
- Explain which assumptions drive the result and what evidence could change them.
A range is useful only when its drivers are clear
A range of £24–£32 million enterprise value tells the reader little without the scenarios behind it. Label base and downside assumptions, distinguish operating changes from valuation changes, and reconcile enterprise value to equity value for each case. Do not count an expected benefit twice in both earnings and a separate premium.
Try the EV/EBITDA calculator, read the equity bridge, then practise in Deal Room.
Accounting reference: IFRS Foundation: IAS 7 cash-flow classification. Explore all finance guides →