Richard Wilson: the timing assumption inside a valuation
Richard asked what happens to an investor's position when the cash flows used to explain a valuation arrive years later than expected.
The valuation relied on an expected future
In his time savers module, Richard described a company explaining its valuation through future cash flow. He then changed one assumption in the example. The business might eventually produce the cash, but take substantially longer to do it.
The agreement was a separate question
He asked whether the investor would receive more equity or some other accommodation if that happened. He said such protection was usually absent in the situations he was describing. This was a question about the terms behind a projection, without a claim that delayed growth automatically changes an investor's rights.
In Richard C. Wilson's words
"if that future cash flow doesn't happen or it takes seven or twelve years to happen instead of two years, then do you get more equity?" (Richard C. Wilson, Due Diligence mini-series)
How to use this
- Identify the expected date of the cash flows supporting the stated valuation.
- Record Richard's question about what the agreement says if that timing changes.
Questions and answers
What assumption did Richard change?
The time required to reach the projected cash flows.
Did he say more equity follows automatically?
No. He asked whether the arrangement provided any accommodation and said it usually did not.