difficult to maintain historical growth rates as the firms
double or triple in size.
Thetrue testfor a small firmlies in howwellit handles
growth. Some firms havebeenable to continue to deliver
theirproductsandservicesefficientlyastheyhavegrown.In
otherwords, theyhavebeen ableto scaleup successfully.
Otherfirmshavehadmuchmoredifficultyreplicatingtheir
success as they become larger. In analyzing small firms,
therefore,itis importantthat youlookatplans toincrease
growth, but it is even more critical that you examine the
systems in place to handle this growth.
Outside Estimates of Growth
Some analysts evade their responsibility for estimating
growthbyusinggrowthestimatesthatareprovidedtothem
either by the management of the company that they are
valuingorbyotheranalyststrackingthefirm.Inthissection,
weconsiderthispracticeandwhethertheresultingvaluations
are more precise.
Management Estimates
Asurprisingnumberofvaluationsuseforecastsforrevenues
and earnings provided by the company management. This
practice does have two advantages: It makes estimation
simplebecausethenumbersareprovidedbymanagers,andit
allowsvaluationanalyststoblameotherswhentheforecasts
are not delivered. The dangers are manifold:
- InChapter1,wetalkedaboutthedangersofbiasin
valuation.Themanagementofacompanycannotbe