Understanding Projections: Hope vs. Reality

Every business for sale comes with projections. Glossy spreadsheets showing hockey-stick growth, optimistic revenue forecasts, and profit margins that would make Apple jealous. But here's the thing: most projections are more fiction than fact.

The Psychology of Projections

Sellers aren't trying to deceive you (well, most aren't). They genuinely believe their business will grow 25% year-over-year because they're finally going to implement that marketing strategy, launch that new product line, or hire that superstar salesperson.

The problem? They've been saying the same thing for the past three years.

Red Flags to Watch For

1. The Hockey Stick

If the projections show flat or declining performance for years, then suddenly shoot up like a rocket the moment you buy it, be very suspicious. Ask yourself: what's changing that will magically transform this business?

2. Unrealistic Growth Rates

A 50% annual growth rate might be possible for a tech startup, but for a traditional Irish business? Probably not. Compare projected growth rates to industry averages and the company's historical performance.

3. Vague Assumptions

Good projections are built on specific, measurable assumptions. Bad ones use phrases like "increased market penetration" or "operational efficiencies" without explaining exactly how these will be achieved.

How to Read Projections Like a Pro

Start with History

Before looking at projections, study the business's historical performance. Has it grown consistently? Are there seasonal patterns? What was the impact of economic downturns?

Question Every Assumption

Don't just accept projections at face value. Ask:

• What specific actions will drive this growth?
• What could go wrong?
• How sensitive are the projections to key assumptions?
• What happens if growth is 50% of what's projected?

Create Your Own Scenarios

Don't rely solely on the seller's projections. Create your own conservative, realistic, and optimistic scenarios based on your research and due diligence.

The Reality Check

Here's a harsh truth: most businesses don't achieve their projected growth. Studies show that only about 30% of businesses meet their financial projections within the first two years.

This doesn't mean projections are useless. They're a starting point for discussion and help you understand the seller's thinking. But they shouldn't be the basis for your valuation or purchase decision.

Making Projections Work for You

Focus on the Downside

Instead of getting excited about the upside potential, focus on what happens if things go wrong. Can the business survive a 20% revenue drop? What if a key customer leaves?

Stress Test the Numbers

Run sensitivity analyses. Change key assumptions and see how it affects the bottom line. This will help you understand which factors are most critical to the business's success.

Value Based on Current Performance

Base your valuation primarily on current and historical performance, not future projections. Treat any growth as a bonus, not a given.

The Bottom Line

Projections are important, but they're not prophecy. They're educated guesses at best, wishful thinking at worst. Your job as a buyer is to separate the realistic from the ridiculous.

Remember: you're not buying the business's potential – you're buying its current reality with the opportunity to improve it. If the projections come true, fantastic. If they don't, you should still have bought a good business at a fair price.