How do you communicate and justify your growth rate assumptions to stakeholders and clients in DCF?

1 Understand your audience

The first step to communicate and justify your growth rate assumptions is to know who you are talking to and what they care about. Different stakeholders and clients may have different perspectives, objectives, and levels of familiarity with DCF and growth rate estimation. For example, a potential buyer may be more interested in the upside potential and the risks of the business, while a lender may be more concerned about the cash flow stability and the debt repayment capacity. A sophisticated investor may be more comfortable with complex models and scenarios, while a novice may need more guidance and simplification. Therefore, you should tailor your communication style and content to suit your audience's needs and expectations.

2 Use multiple sources and methods

The second step to communicate and justify your growth rate assumptions is to use multiple sources and methods to derive and validate them. Growth rate is not a single number that can be easily obtained from a formula or a database. It depends on various factors, such as the industry, the market, the competitive advantage, the strategy, the innovation, the regulation, and the macroeconomic environment. Therefore, you should use a combination of top-down and bottom-up approaches, historical and forecasted data, internal and external information, and qualitative and quantitative analysis to estimate and cross-check your growth rate assumptions. You should also compare your assumptions with those of your peers, competitors, analysts, and industry experts to benchmark and justify them.

4 Use visual aids and tools

The fourth step to communicate and justify your growth rate assumptions is to use visual aids and tools to illustrate and demonstrate them. Numbers alone can be dry and boring, and they may not convey the full story or the implications of your growth rate assumptions. Therefore, you should use charts, graphs, tables, diagrams, or other visual elements to show how your growth rate assumptions affect the cash flow projections, the valuation results, the return metrics, or the risk profiles of the business. You should also use tools such as Excel, PowerPoint, or online calculators to create interactive and dynamic models and presentations that allow you to manipulate and adjust your growth rate assumptions and show their impact on the outcomes.

5 Be realistic and flexible

The fifth step to communicate and justify your growth rate assumptions is to be realistic and flexible. Growth rate is not a fixed or certain parameter that can be precisely predicted or measured. It is a subjective and uncertain estimate that reflects your best judgment and expectations based on the available information and assumptions at a given point in time. Therefore, you should not be overconfident or dogmatic about your growth rate assumptions. You should acknowledge the uncertainty and variability of the future, and be open to feedback, criticism, and new information. You should also be willing to revise and update your growth rate assumptions as the situation changes or new data emerges.

6 Follow ethical and professional standards

The sixth and final step to communicate and justify your growth rate assumptions is to follow ethical and professional standards. Growth rate is not only a technical or analytical input, but also a moral and ethical one. It can influence the decisions and actions of your stakeholders and clients, as well as the value and reputation of the business and yourself. Therefore, you should not manipulate, exaggerate, or misrepresent your growth rate assumptions to serve your own interests or agendas. You should not use unreliable, outdated, or biased sources or methods to estimate or validate your growth rate assumptions. You should not hide, omit, or ignore relevant or material information or assumptions that may affect your growth rate estimates. You should always be honest, objective, and transparent about your growth rate assumptions, and respect the opinions and interests of others.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?