Hockey Stick Projection for a business
For business forecasts or predictions, data points are indicated on a chart, and these data points are connected. Sometimes, business results can sharply go up. And then we can have an interesting shape on a chart like this:
A hockey stick projection represents a business forecast increase shape that indicates a few years slow or flat growth. Then the business revenues increasing rapidly for the next few years. The name Hockey Stick Projection is created because the line chart resembles a hockey stick in shape.
This forecast will usually show that the business revenues, earnings before interest, taxes, depreciation, and amortization (abbreviated as EBITDA), and EBITDA margins will also improve significantly.
Understanding hockey stick charts
The hockey stick used for playing a hockey game has a blade, a curve, and a long shaft, which the players hold. Similarly, the hockey stick chart will have low activity levels (indicated on the y axis) over a comparatively shorter period of time. Then, a sudden bend in the chart indicates the chart’s inflection point, followed by a long, straight rise. In addition to business sales, these charts are also used to show massive changes in different areas, like poverty statistics, temperatures worldwide, and scientific research on environmental and medical conditions.
One of the advantages of using a hockey stick-shaped chart is that it will be noticed immediately. If there is a major and sudden change in the data from the flat period, it is a clear indication that more attention should be given to understand the factors which caused the change. When there is a significant change in the data over a short period of time, it is important to ensure that if there a fundamental change in the business or other conditions, or whether the change is an aberration, and the business will revert to the original condition soon.
The explanation for business sale
If the business owner cannot provide proof to support his rapid growth assumptions, the hockey stick type projections are usually not considered by the buyer to determine the value of the company he wishes to purchase. To convince the buyer that these forecasts are predictable, the seller and his advisors for the deal should consider providing additional information like
– what is the fundamental reason or main catalyst due to which the financial results which were showing flat growth, and now increasing rapidly like a rocket
– in case the EBITDA margins are also increasing, the seller should be able to provide supporting information like the cost structure, which corresponds to the increase in business revenues
In addition to preparing a projected income statement for the rapid growth predicted, it is also advisable to prepare a statement showing its cash flow and balance sheet.
– it is necessary to analyze if business growth is sensitive to specific factors. It is necessary to plan for different scenarios; the business should have a plan B, plan C. In some cases, when the factors affecting the business growth are very unpredictable, a plan D and plan E may also be necessary