7 Key Factors Used to Value a Business
While it may seem like a simple game of numbers, business valuation is actually a complex process. Determining a company’s value depends on a number of different factors: some obvious and some less straightforward.
Beyond that, the approach to business valuation can change depending on who is carrying out the valuation process, the type of company being valued, or the industry the company operates in. After all, no two industries or companies are exactly alike, and different valuators will think differently.
That being said, there are several key elements that most experts will consider when determining a company’s value. Here’s our breakdown of the most important factors in valuing a business.
1. Earnings
Looking at a company’s earnings over time is probably the most obvious factor of all. As they say, “money talks.” When considering how to value a business, most professionals will examine the company’s income and how it has grown over time. If your company can show an increase in revenue growth, that will definitely help you achieve a higher valuation.
2. Development
Another factor that valuators will use is the stage of development your company is in. A full-fledged company with an established staff and clientele will almost certainly get a higher valuation than a company in the early stages of growth.
This doesn’t mean you should give up if your company is only just getting started. Rather, it means that you should focus on your company’s future development and work hard on establishing yourself within your industry.
3. Industry
Speaking of industry, the specific industry a company is in can have a big effect on how it is valued. Some industries are considered “hotter” than others. Some examples of current “hot” industries include biotechnology, artificial intelligence, and healthcare/pharmaceuticals. If your company operates in a desirable industry, it is likely to be valued at a higher level. If your industry is slower, it may be harder to achieve a high valuation for your business.
4. Talent
An impressive and effective staff can definitely impact a company’s value. Experts who determine how to value a business will most certainly examine the talent pool working for the company. Businesses that boast a skilled, experienced, staff that achieves reliable results definitely look good to valuators. On the other hand, inexperienced staff and poor management can have a negative impact when determining how to value a business.
5. Reputation
Though a reputation can be tricky thing to quantify, it can have a real effect on how a business is valued. Even if a company shows profitability, their valuation can be lowered by a poor reputation. If the word on the street is that a business is ineffective or bad to work with, the company’s valuation will likely decrease.
The opposite is also true: if a company has a great reputation in its community/industry, experts will be driven to award a higher valuation.
6. Client Diversity
A diverse client base is considered a positive asset when determining how to value a business.
Having clients across multiple different businesses and industries helps ensure the security of your business. After all, if all your clients are concentrated in one business or industry, trouble in that industry could spell disaster for your business. It’s far safer to have clients spread out across different fields.
Showing a diverse client base will definitely benefit a business’ valuation process.
7. The Economy at Large
If the overall economy is more robust, business valuations are likely to go up across industries. Conversely, during periods of recession, business valuations tend to decrease. It’s important to consider overall economic trends when determining how to value a business.
Business valuation can be a difficult and multi-faceted process. For help valuing your business, you can rely on Ellrich, Neal, Smith, and Stohlman, P.A. Contact us today to speak with a business valuation expert.