Valuing a business is often complex. This is due to the fact that business evaluation is subjective. Often times the value of a business is at the mercy of the person conducting the evaluation. Another level of complexity is the fact that the person conducting the evaluation has to assume that all the information provided is correct and accurate. In this article we will explore six key factors to consider when determining the value of a business.
Factor #1 – Intangible Assets
Intangible assets are difficult to value. Intellectual property such as trademarks, patents and copyrights can impact the value of a business.
Factor #2 – Product Diversity
Businesses with only one product or service are at a greater risk than a business that has multiple products or services. Product or service diversity plays a role in most valuations.
Factor #3 – ESOP Ownership
A company that is partially or completely owned by its employees can provide a challenge to evaluators. This type of ownership can limit marketability, which in turn impacts value.
Factor #4 – Critical Supply Sources
The evaluator will take notice if a business is vulnerable to supply disruptions. An example of this is using a single supplier to achieve a low-cost competitive advance. A supply disruption could affect a business’ competitive edge. When supply is at risk, there could be a disruption in delivery and evaluators will notice this factor.
Factor #5 – Customer Concentration
A company with one or two key customers can impact the value of a business.
Factor #6 – Company or Industry Life Cycle
A business reaching the end of an industry life cycle will face challenges during the evaluation process. A typewriter repair company is an example of this type of business. A business facing obsolescence usually has bleak prospects.
Other issues can impact the valuation of a company. EBIT Associates provides independent and objective valuation advisory services, which range from merger and acquisition transactions to asset appraisal and strategic planning.