Why we usually need 3–5 years of historical performance in business valuation

Sometimes a company’s performance looks like a wave —
up one year, down the next.

This doesn’t always mean the business is unstable.

It could be:

• A cyclical business
• Major repair or maintenance costs that occur every few years
• Industry-wide demand or price cycles

Looking at several years helps us identify patterns, not just numbers.

For example:

• Is demand cyclical?
• Are prices volatile or stable?
• Do expenses spike every few years due to the nature of the business?

Very often, we see cases where revenue remains strong, but net income drops sharply in certain years.
When we dig deeper, the reason is usually one-off or periodic expenses, not poor operations.

This is why relying on only one year of financial performance can be very misleading.

In practice, we usually prefer 3–5 years of historical financial statements when doing a business valuation.

Of course, this isn’t always possible for newly established companies.
But for long-established businesses, 3–5 years of financials should be a must at the first step of valuation.

#ORNA #BusinessValuation #Consult