What Most People Get Wrong About Valuation
When someone says they are "doing a DCF," they often mean they are filling in a spreadsheet with numbers that produce an output. But a DCF is only as good as the judgment embedded in its assumptions — and the judgment is where the real intellectual work happens.
Valuation is fundamentally an exercise in forming a view of a business: what it does, how durable its competitive position is, what drives its economics, and what could cause those economics to change. The formula is just the container for that view.
The Three Layers of Valuation Work
Layer 1: The Technical Framework This is the mechanics — knowing how to build a DCF, run a comps analysis, or structure a precedent transaction analysis. It is necessary but not sufficient.
Layer 2: The Business Understanding This is where good analysts spend most of their time. What does the business actually do? How does it make money? What are the unit economics? How capital-intensive is the model? What is the competitive dynamic in the industry? How durable is the customer relationship?
Layer 3: The Judgment Calls This is the part that separates a good financial analyst from a great one. What is the right discount rate given the specific risk profile? What revenue growth rate is realistic given industry dynamics and competitive positioning? What margin structure will the business converge to at scale?
Why Operating Experience Changes How You Value Businesses
Having managed a manufacturing operation, I think about valuation differently than someone who has only studied it academically. I understand what cost variability looks like in real businesses. I know that revenue projections made in a conference room rarely survive contact with the market. I have seen how working capital dynamics can destroy cash flow even in a profitable business.
This operating perspective makes me more skeptical of aggressive assumptions and more focused on the downside — which is exactly where real risk lives.
Valuation as Communication
A good valuation is not just an analytical exercise — it is also a communication tool. The ability to explain your assumptions clearly, defend them under pressure, and walk a client or investor through the logic is as important as the technical accuracy of the model.
Numbers without narrative are incomplete. Valuation done well is the integration of both.