How to Present a Valuation Range Instead of a Single Fair Value

Distinguish the questions answered by sensitivity and scenarios

Sensitivity analysis examines changes in a particular variable while holding other conditions constant. Scenario analysis groups the ways revenue, prices, margins, and working capital move together under conditions such as weaker demand or greater competition. An upper bound combining only favorable inputs may be impossible to achieve simultaneously. Conversely, stacking every worst-case input into a lower bound can create the contradiction of perpetuating conditions under which the business would already have shut down. A few internally consistent situations are more helpful to interpret than simply widening the range.

Focus on the key variables driving the range

Varying every small cost item, including those with little effect on value, can obscure the important uncertainties. First identify the variables among revenue growth, normalized margins, reinvestment, and discount rates that materially change the result. For relative valuation, show the earnings range and applied multiple range separately, and explain why they are combined. Check whether a simple averaging approach involving low earnings and high multiples makes sense, and whether a multiple discount counts risk already included in earnings again. Record the reference date of the data used so comparisons on the same basis remain possible over time.

Provide a basis and interpretation when assigning probabilities

Labels such as optimistic, base, and pessimistic do not determine the likelihood of each situation. If you assign probabilities, check that they total 100% and that the situations are mutually exclusive; disclose that they are assumptions when evidence is weak. A probability-weighted value can differ from both the most likely realized value and a loss limit. A wide range does not necessarily indicate poor analysis; it may signal substantial uncertainty in the information and the business. When new results are released, record which conditions have become more or less likely rather than simply changing all the numbers. This helps improve the valuation.

What to check

• Are the business conditions corresponding to the lower and upper bounds clear?
• Have you distinguished sensitivity from scenarios in which several variables change together?
• Have you avoided counting the same risk in both earnings and multiples?
• Have you stated the basis and total of the probabilities and the limits of interpreting the range?