5 Factors that Determine Your Business’s Valuation

What is a business valuation?

Think of a business valuation as placing your business on the scale, assessing everything - from your physical assets, the earnings, sales, and even those invisible yet invaluable elements like your brand’s reputation, customer relations, and market position. But it’s not just about the here and now! A savvy valuation dives deep into the future, exploring potentials and possibilities, assuring you and the potential buyers that the investment is not just safe but promising.

It's difficult to put a price tag on a lifelong project. Figuring out how much a company is worth involves much more than crunching spreadsheets and creating financial projections. It's about the nitty-gritty of what's making your business tick and showing buyers that your business is healthy and will continue to generate cash flow for years to come.

Uncover the strengths and weaknesses of your business from a valuation perspective and you'll be in the best position to win a great deal.

1. Assets

Kick things off by adding up the total value of everything your business owns (short-term and long-term) and owes (short-term only), including physical and intangible assets. This will give you a baseline of your company’s financial position post-transaction.

Physical assets are everything from your office space and machinery to coffee makers. Get these evaluated at their current market rates and consider deprecation and future utility.

Intangible assets are more difficult to measure, but they pack a serious punch in adding value to your business. These assets could be branding, reputation, customer relationships, or proprietary technologies.

Being able to show an exhaustive report on the current state and value of your company assets will show a buyer that your operation is well equipped and prepared for the future.

2. Revenue

Explore revenue stability, diversity, and cyclicality by asking questions like:

• "How dependable is my income?"
• "Am I overly dependent on one customer?"
• "Are there multiple sources of revenue?"
• "Do I have a way of collecting recurring revenue?"
• "How does my revenue fluctuate through different seasons?"

Diving into these aspects will not only help you understand the resilience of your business's income but also carve out opportunities to enhance it, making it a more attractive proposition for buyers. The more durable and diverse, and the less cyclical your revenue is, the better.

3. Earnings

Navigate through your operating margins using generally accepted accounting principles and be ready to narrate the story that lives behind those numbers. A company's operating margin is a key indicator for how efficiently it generates profits from sales. Buyers pay close attention to operating margins because it shows scalability, propensity for debt-coverage, and sensitivity of the bottom-line to the top-line.

Inconsistent operating margins typically point to a higher level of business risk. However, reviewing a firm's operating margins over time can help assess if there's been a positive shift in performance. This improvement can result from enhanced internal controls, smarter resource utilization, refined pricing strategies, and more effective marketing initiatives.

Fundamentally, the operating margin measures the proportion of profit a company retains from its central operations, relative to its overall revenues. It's a crucial metric for investors, as it indicates whether the primary source of a company's income is its operational activities or other channels, such as investments.

4. Location

Your geographical position can significantly impact your business value in terms of customer access, logistical convenience, and market penetration. Analyzing the value added by your business’s location involves considering various factors that influence customer inflow and operational flow.

On another note, think ahead about geographical expansion – if it’s a viable option, exploring new territories could not only enhance business value but open up fresh revenue streams and client bases, subsequently making your business a more enticing prospect.

5. Business Strategy

The existing structures, networks, and customer base of your business can potentially serve as a valuable strategic asset for new owners. By highlighting how the current strategic position can serve as a launching pad for new opportunities, it presents the business not as a static entity, but as one with potential for growth and expansion.

Some buyers, particularly strategic acquirers (like a competitor or a company in a related industry), may value a business more highly if it fits well with their existing operations or expansion plans. If your business strategy aligns with theirs, they might be willing to pay a premium, anticipating that the merger will lead to greater market share, cost reductions, or other synergies.

By clearly communicating strategic advantages, you can justify a higher valuation during negotiations with potential buyers or investors. They're not just buying the assets and profits; they're buying a vision of the future.