Why a Valuation Calculator Isn’t Enough

Posted by on Jul 12, 2018 in Financial Modeling | No Comments

Valuation calculators are prevalent in online searches. Type in the term and you’ll receive a long list of search engine results. A valuation calculator is popular because it gives a quick snapshot of a big picture…which is great to use during the early screening phase of a project.

But when you get to the negotiation or raising-capital stage, depending on the high-level financial snapshot of your project or asset isn’t just not good business sense – it’s highly risky. Projects tend to be complex, and not understanding key factors of your project – like tax laws – leaves your project or asset vulnerable and unprotected and at risk of losing investment or leaving money at the table.

How to Use a Valuation Calculator

A valuation calculator or off-the-shelf valuation tool like IHS PowerTools or ARIES Petroleum Economics are great to use in the initial stages of vetting a project or asset. Like a mortgage calculator that can give you a good idea on the affordability of a home, a valuation calculator is a great way to get an idea of what your business or asset is worth. If you’re considering selling or raising additional capital, a valuation calculator is a great first step to take. But it should not be the only step.

Graduating to a Customized DCF Model

After determining that you’re moving forward with selling or raising additional capital, it’s time to leave the world of valuation calculators behind and develop an Excel-based financial model that is customized to your particular asset or company.

As a small or growing business owner, you want to understand the impact that uncertainties will have on your project. A customized Excel financial model lets you test assumptions and play what if scenarios. If the DCF model is designed well, the functionality of the model will be encapsulated on one page that includes key inputs and key outputs.

With a Darby Finance Excel Financial Model, inputs are laid out in a way that’s simple and easy to use, so not only you, but other key stakeholders can utilize your financial model to review analyses, and make better financial decisions.

Negotiate Better with a DCF Model

A customized DCF model allows you to bring your ‘A’ game to negotiations. If you are depending on a valuation calculator to support your financial arguments, you’re either going to leave money on the table or overpay depending on what side of the table you’re on. As a developer, an owner, or a potential investor, a customized financial model will help you understand what you’re giving up and the immediate impact your evaluation will be into other aspects of the project.

Additionally, a customized DCF model gives you justification that a valuation calculator cannot provide. A customized model allows you to rank alternatives and gain valuable outputs such as net present value, internal rate of return, profitability index, and return on investment; metrics that are needed in negotiations or your investment presentation to your stakeholders.

If you’re ready to move to the next step of valuing your business, project or asset, give Darby Finance a call.


About Darby Finance – A Leading Financial Consulting Firm

Darby Finance helps clients make better financial decisions by transforming complex data into a compelling and easy-to-understand financial story. We work alongside our clients to develop customized financial models, valuations, and sophisticated investor presentations while utilizing more than 40 years of experience in energy, finance and investor relations.

How can we support your projects?

Let's Talk