The Little Book of Valuation, Updated Edition

Chapter FiveStories and Numbers: Narrative, Value, and Price

AFTER READING THE LAST two chapters on value and price, you may have concluded that both valuation and pricing are driven by numbers alone, but you would be wrong. In this chapter, we will argue that there is a story behind the numbers in the valuation and pricing of a company and that the key to valuing companies well is being able to craft plausible business stories and connecting these stories to the numbers you use in your valuation. In this chapter, we will begin by explaining how valuations connect stories to numbers and then describing the process of telling a business story, checking that story for reasonableness, and converting that story into valuation inputs and value.

Valuation as a Bridge

A good valuation is a bridge between stories and numbers, connecting a story about a business to inputs into a valuation, and by extension, to value. That process is encapsulated in Figure 5.1.

Put simply, a compilation of numbers in a spreadsheet or a model will give you a financial model, not a valuation, and a story about the prospects for a business, no matter how soaring and compelling, may just be a fairytale. For a valuation to be rooted in reality, every number in your valuation, measuring growth, risk, or profitability, has to have a story that explains it, and every story that you tell about your company, ...