How to Stress-Test a Valuation Before You Recommend

Operating Rules for Decision Files

1. One decision question. Every valuation must serve a single ask (for example, “Is this asset worth $50M at a 12% IRR?”). Do not wander.
2. Assumptions segregation. Label which assumptions are management-provided and which are deal-team derived. Mixing them creates a single point of failure in credibility.
3. No confidence-as-evidence. “We are highly confident” is not a financial metric. If you lack data, say so; do not substitute conviction for evidence.
4. As-of date. Valuations are snapshots. Every decision file needs a timestamp so later market moves do not silently rewrite the recommendation.

Common Failure Modes

• Hidden terminal-value dependence. When 80% of value sits in a terminal growth rate or exit multiple that looks like a magic wand, the near-term model is decoration — not analysis.
• Comps cherry-picking. A peer set that only includes high-margin outliers to justify a premium is advocacy, not valuation. If the ugly peers are missing, the multiple is biased.
• The soft downside. A downside that still clears the hurdle rate is not a stress test; it is a comfort blanket. A real downside should be painful enough to change the recommendation.

Pre-Send Checklist

• [ ] Base, upside, and downside cases labeled with core drivers
• [ ] Sensitivities limited to the 3–5 variables that move the answer
• [ ] Explicit kill point / breakpoint stated
• [ ] Management assumptions distinguished from deal-team assumptions
• [ ] As-of date visible
• [ ] Downside case actually tests business viability

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Sources

• CFA Institute — valuation and investment-decision practice: thesis, evidence, scenarios, and recommendation discipline.
• OECD, Principles of Corporate Governance — transparent, accountable decision records for capital allocation.
• SEC, Investor Bulletin: How to Read a Form 10-K — primary-source discipline for company claims feeding a valuation.
• MMARW, How to Write an Investment Memo — decision/ask, as-of date, change conditions, and openable sources.