In the world of business valuation, the sustainable growth rate plays a crucial role. This article provides valuable insights into the factors that influence this rate and explains how valuation experts can determine it.
In the world of business valuation, the sustainable growth rate plays a crucial role. This article provides valuable insights into the factors that influence this rate and explains how valuation experts can determine it.
Monetary policy guidelines, industry forecasts and long-term growth rates of comparable companies, taking into account the individual circumstances of the valuation object, provide the first essential indications. However, the valuer should always assess the following determinants of sustainable profit growth in order to determine the sustainable growth rate:
Profit growth is the result of all of these determinants and can therefore be fed by all or only some of them. A negative development of individual effects can be compensated for by others.
In the short term, all three influencing factors are strongly determined by the current state of the company and the management's immediate options for action. In the medium term, the strategic influence of management becomes more important, whether through investment decisions, changes to the sales strategy or new product developments. However, both short and medium-term measures are regularly already reflected in the detailed planning phase and are therefore less of an issue when determining the sustainable growth rate.
In the long term, the determinants of sustainable growth are generally influenced by the market in which the company operates and the competitive structure. In young markets, there is often scope for business expansion and aggressive pricing policies. Rising purchase prices can generally be passed on, and production efficiency is not yet a central aspect of corporate management. In more mature markets, volume growth is often only possible at the expense of competitors and is accompanied by a more cautious pricing policy. Competitive structures are usually more established and production efficiency is often the key success factor here.
Consciously or unconsciously, the determination of the sustainable growth rate always involves the valuer taking a position on sustainable volume growth, pricing scope and increasing the production efficiency of the valuation object. If the valuer is unable to make a determination without further ado due to a lack of market data, it is always advisable to adopt as neutral a position as possible.
This can consist of assuming no volume growth and no increase in production efficiency. It is then also advisable to assume an average scope for price setting. A good indicator under these assumptions is the general inflation expectation. Here there is no quantity effect per se, and the implicit price effect lies in the "middle of the economy".
The sustainable growth rate is a central factor in business valuation, which is influenced by various determinants. Careful analysis of volume growth, pricing scope and production efficiency helps valuers to set a realistic and well-founded growth rate. In the absence of specific market data, it is advisable to take a neutral position based on general economic indicators such as inflation.
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