Various factors come into play when third-party certified valuators are assessing the value of a privately held company for the Independent Stock Market. Here are some of them.
Quality and Depth of Management
When a company has competent, well-trained managers, and many of them, the business is likely to run smooth. If your business has an established training program and strives to promote from within the organization, you are likely to rank high in this area.
Importance of Key Personnel
If there is only one key player (the CEO, for example) that is holding everything together, without a realistic replacement, you will likely score low in this risk area. Especially if the purpose of the valuation is to sell the company so that the key player can retire.
Stability of Industry
Some industries that have been stable in the past are having issues with this area currently – such as the real estate and motorized vehicle industry. If your industry has continued to move forward throughout the recession, there is a good chance you will score high here.
Diversification of Product Line
Do you stick to one product? Do you stick to several products? In most cases, valuators are looking for a happy middle ground. One product might be overtaken by an competitor. Several products might not give you the ability to concentrate on its efficiency, improvement, or marketing.
Diversification of Customer Base
In this instance, the broader the customer base, the better. I have seen several instances where companies have been purchased for the value of their customer base alone – regardless of poor inventory and management. Of course happy customers are worth more. Often this can be determined through testimonials, percent of return customers, and percent of complaints.
Diversification & Stability of Suppliers
Relationships with key vendors and the probability that those suppliers will continue their relationship with the company is a key ingredient in the valuation process. Having back-up vendors is critical as well. If your only vendor goes out of business, or raises his prices significantly, it could hurt your business.
Geographic Location
The real estate slogan “location, location, location” refers to the importance of this risk factor. Were a solid and productive company in one location to open its doors in a non-receptive place, it would go out of business. This can be determined by the number of customers, and potential customers.
Stability of Earnings
If you have had steady increases in revenue throughout the years, at least in the last three-five years, you will rank high in this area. Stability in revenue shows the potential to continue that trend in the future. Companies bringing in significant revenue consistently should seek a higher price when selling their company than those who do not.
Earnings Margins
Bringing in lots of revenue is one thing – but making a profit consistently is just as or even more important. Breaking even is not seen as big of a negative factor as losing money is. Continuous quarters in the red will bring in a lower sales price, even if the company purchasing the company has the tools and resources to reverse the negative trend.
Financial Structure
There are many factors that could determine whether businesses score high in this area. Some of which, regrettably, are subjective in nature instead of objective. Are key personnel spending “too much” on wages or perks? Is the cost of goods over 30% of revenue? What is the cost of your building and maintaining it? Are their loans with significant interest rates that will not be paid soon? These are some of the questions valuators ask about a company’s financial structure.
When determining the value of your business, take a good look at where you stand regarding each area discussed. If you have questions, call the Independent Stock Market. Perhaps there is an area where you can improve the processes, increase the quality of staff, or decrease expenses before you have a certified valuator tell you what your company is worth.
