Business Valuation Scorecard: 7 Key Components

Whether consciously or not, many business owners and leaders have their eye on the end game, more commonly known as an exit strategy. Whether you are an owner, manager or stock holder, presumably your interests are aligned to maximize the value of the company. The more valuable the company, the more you will get out of it - either in compensation, severance, profit-sharing or proceeds from a sale.

Increasing the value of a company requires years of planning and execution. Most valuators look at the last five years of operating results to substantiate their conclusions. So, let's look at maximizing the value of your business today for a potential sale or transfer tomorrow.

Below are seven factors to consider, which can impact the value of your business:

1.  Operating History, Earnings Growth

The ability to grow and generate profit is one of the driving factors for an increased valuation. Nothing is more valuable than a well-conceived and executed operating plan with demonstrated results.

2.  Reliance on Key Personnel

The overall valuation of a business will decrease if the business is overly reliant on the owner, founder or any other individual. If the future viability of the business can potentially walk out the door, buyers will be less willing to pay a premium for the company. 

3.  Diversification

A healthy business is not overly reliant on any one customer, supplier, product, or geographic area. If the revenue or earnings of the company are dependent upon the relationship of a few customers or suppliers, then a potential buyer will perceive this as increased risk and will not be willing to pay a premium. Same is true for a single product line company or one operating in a limited geographic area.   

4.  Competitive Position

Financial buyers want a return on their investment and will pay more for companies with a strong competitive advantage (and attractive future growth opportunities). On the other hand, strategic buyers may be interested in companies with weak competitive positions if they believe they can enhance the market position of the company - and hence the value, once purchased. But, they won't necessary be willing to pay for it!

5.  Work Force

It is generally presumed that the workforce will stay on with the company. There is great value to a potential buyer if employees are well tenured, experienced and reliable. A strong middle management team that can weather the transition and continue to forge the business ahead can be invaluable to a potential suitor and will increase the valuation of your company.

6.  Financial Risk / Contingent Liabilities

Not surprisingly, buyers are looking for a reasonably strong balance sheet with good liquidity and working capital. Contingent liabilities - such as outstanding litigation or a environmental issue - would be assessed and a discount taken for a presumed outcome of the pending issue.  

7.  Size

Yes, size matters. The larger the company, the less perceived risk and the higher the market valuation multiple.  It is a straight-forward and time-tested correlation.

As you are developing your 2014 Operating Plan, consider the factors outlined above.  Paying time and attention to these areas will not only build a stronger company today, but will also enhance the likelihood of a graceful exit tomorrow with a nice nest egg for all of your efforts. 

Until next month, Point Your Business Where it Needs to Go! 

Best Wishes,

 
Kelly
©2014, Soundpoint Consulting, LLC

Sound Consulting. Solid Results.