Valuation is often presented as a mathematical exercise—models, spreadsheets, and discounting techniques working neatly toward a final number. In practice, however, valuation is better understood as a professional judgment expressed through numbers. The apparent precision of outputs depends not on formulas alone but on the assumptions that quietly support them.

Experienced valuers know that small changes in assumptions can produce disproportionately large changes in value. Understanding this “art of assumptions” is therefore essential not only for valuers but also for bankers, lawyers, courts, and clients who rely on valuation outcomes.

A single assumption, marginally altered, can change value by crores—not because the asset has changed, but because expectations and interpretations have.

Assumptions: The Hidden Structure of Valuation

Assumptions rarely appear prominently in valuation reports. They are embedded within growth forecasts, risk premiums, terminal values, and normalization adjustments.

Unlike financial statements, assumptions are not historical facts. They are forward-looking judgments about how an asset or business may perform, how markets may behave, how risk should be priced, and how sustainable current advantages are likely to be.

Two valuers may use the same method, the same data, and the same standards—yet arrive at different values. Such divergence seldom arises from calculation; it arises from differences in assumptions.

Why Small Inputs Create Large Value Swings

Valuation models are inherently non-linear. Minor input changes often produce amplified outputs.

For example:

a. A 1% change in long-term growth can raise value by 10–20%.

b. A modest increase in the discount rate can erase years of projected cash flows.

c. Extending a high-growth phase by just one year can significantly inflate the terminal value.

As valuations depend heavily on future cash flows rather than present earnings, sensitivity increases as projections extend. Valuation does not fail because assumptions are imperfect; it fails when assumptions are not critically examined.

Assumptions Are Contextual, Not Standardized

A common misconception is that valuation assumptions can be standardized. In reality, assumptions must align with the purpose of the validation.

The same property or business may command different values under different contexts—legitimately and professionally. Consider valuations undertaken for the following purposes:

a. Merger or acquisition negotiations

b. Family settlement or divorce proceedings

c. Regulatory or judicial purposes

Each context reshapes assumptions relating to control, synergy, risk, stability, and continuity. Assumptions are therefore not merely numerical inputs; they are context-specific interpretations of economic reality.

The Human Element in Assumptions

Although valuation models appear objective, assumptions often absorb human emotion, particularly in sensitive matters.

In family disputes or shareholder exits, one party may adopt optimistic growth assumptions while another emphasizes heightened risk. These positions appear rational on paper, yet are often influenced by expectations and desired outcomes.

An experienced valuer recognizes this influence—not to favour any side, but to ensure that assumptions remain balanced, transparent, and defensible.

Capitalisation Rate: Small Number, Big Impact

Few inputs are as sensitive as the capitalisation rate. A change of even 0.25% or 0.50% can translate into lakhs or crores of difference, particularly for income-generating assets.

Selecting and defending an appropriate rate requires careful linkage to the following factors:

a. Location and micro-location

b. Asset age and condition

c. Tenant profile and income stability

d. Legal and situational risks

e. Prevailing market sentiment

This single assumption often carries more influence than multiple secondary adjustments combined.

Practice Insights: Recent Assignments

Divorce Financial Settlements

In divorce-related valuations, properties frequently carry buyer-perceived marketability risk, despite unchanged physical attributes. Typical assumption-based adjustments include:

a. Conservative market rent expectations

b. Slight upward shifts in capitalization rates due to legal uncertainty

c. Cautious views on liquidity and holding period

Individually modest, these assumptions can collectively result in a material variation in the concluded value. In such assignments, clear disclosure of assumptions is as critical as the final value itself.

Merger Valuations

Valuations for mergers or restructuring emphasize continuity, synergies, and long-term sustainability rather than immediate marketability. Even modest optimism in growth or income stability—when supported by operational realities—can significantly influence value. Applying generic market assumptions without regard to purpose may understate economic worth.

Other Valuations

In other assignments—such as Stamp Duty and Ind-AS valuations—assumptions are often constrained by documentation and regulatory considerations. For instance:

a. Additional built-up area at a terrace level could not be considered due to the absence of supporting approvals, resulting in valuation based only on documented construction.

b. In another case, despite the availability of NOCs from aviation and water-supply authorities, the absence of a sanctioned building plan required the property to be valued as a vacant industrial plot rather than a commercial site—significantly affecting value, as a mere change in land use would have increased guideline value by about 40% to 50%.

These assignments reinforce that assumptions are not academic constructs; they directly influence financial outcomes.

The Valuer’s Responsibility

A valuer cannot eliminate assumptions but must:

a. Make them explicit

b. Ensure internal consistency

c. Align them with purpose and applicable standards

d. Defend them with logic rather than convenience

Good valuation is not about numerical precision; it is about credibility.

Conclusion

Valuation, at its core, is a narrative supported by numbers. Assumptions shape that narrative; calculations merely express it. The objective is not a single “correct” figure, but a credible and well-reasoned value, grounded in realistic assumptions and an appropriate context.

Mastery of assumptions is what ultimately distinguishes an experienced valuer from a mere calculator.

For any clarifications or queries, please feel free to reach out to us at:
admin@fintracadvisors.com

Disclaimer

The material presented on this blog is intended solely for informational purposes. The opinions expressed here are solely those of the respective authors and do not necessarily reflect the views of Fintrac Advisors. No warranties are made regarding the completeness, reliability, or accuracy of this information. Any actions taken based on the information presented in this blog are solely at the reader’s risk, and we will not be liable for any losses or damages resulting from its use. Seeking professional expertise for such matters is strongly recommended. External links on this blog may direct users to third-party sites beyond our control. We do not take responsibility for their nature, content, or availability.