Hockey Stick Projection for a business
For business forecasts or predictions, data points are indicated on a chart, and these data points are connected together. When the revenues for a business of the last few years are similar, indicating flat growth, and then the business revenues are shown increasing rapidly for the next few years, this business forecast is called the Hockey Stick Projection since the line chart resembles a hockey stick in shape. Usually this forecast will also 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 game of hockey has a blade, a curve, and a long shaft, which the players hold. In a similar manner, the hockey stick chart will have a low levels of activity (indicated on the y axis) over a comparatively shorter period of time, and then there is a sudden bend in the chart indicating the inflection point in the chart, 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 chart which is hockey stick shaped 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.
Explanation for business sale
If the business owner is unable to provide proof to support his assumptions for rapid growth, 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 the cash flow and balance sheet for the business.
– it is necessary to analyse if the 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 be also necessary