The Net Present Value calculation indicates a business is worth its “risk adjusted future cash flows.”
The future portion of that statement indicates that buyers are willing to pay more for something they anticipate growing. This is practically seen by two of the most common approaches to business valuations using cash flow projections: DCF and LBO.
Declining revenues can indicate a company’s slide toward obsolescence as competitors edge the business out of the market. This fear drives investors to seek businesses with differentiated offers that can withstand the attack of competition. Growing companies generally demonstrate strong product-market fit. Customers find the company’s offering compelling, so more is purchased. This provides investors with confidence that the business can continue to produce strong cash flows and hold a dominant market position.
Maintaining constant revenues is not good enough either; there is no middle ground. Healthy sectors grow, so the pie of available revenue increases. If a company in a growing sector holds revenues constant (no growth or decline), their market share is actually decreasing. Once again this is off-putting to investors as this constant revenue business is losing market share.
Even businesses with growing revenues that are not keeping pace with rapid industry growth can fade into irrelevance. It is crucial for business owners to know the growth rate of their industry as a benchmark against their growth.
One of the best indicators of future growth is past growth. A history of consistent growth shows a company has successfully executed on a growth strategy and can presumably continue to grow the business. This provides investors with confidence that their investment will increase in value. A growing company stays ahead of market changes allowing it to gain market share and fight off competitors. Everything is growing or dying. Keep growing your business!