The first thing to keep in mind regarding the valuation of a business is that there are many different methodologies for valuation. Some methods may weigh income more heavily as a factor, while others may look more closely at “market value” based on other similar assets that have been sold recently.
A company’s valuation could be radically different depending on who actually conducts the appraisal, and the truth is, your business is worth whatever someone is willing to pay for it.
However, there are a number of factors that are traditionally considered when calculating the value of an existing business. Below we have detailed six of the most common.
Please keep in mind that this blog is not intended as legal advice for your specific business transaction, nor is this list all-inclusive. Many other factors may be considered, and it is important to have a skilled business attorney advise you on your unique circumstances. If you are interested in buying or selling a business, please contact the Trembly Law Firm today.
1) Growth Prospects
This factor looks at how much potential the business has to grow in the future. This aspect of the valuation may consider the company’s growth prospects as a business regardless of its industry and based on the company’s unique potential, and it may look at the company’s potential for growth based on its industry. Thus, if you have a business model with high growth potential, or if you are in an industry that will likely see significant growth, these factors could increase the value of the business.
2) Earnings history
Income is a major factor in the valuation of any business. Particularly, someone appraising the value of a business will look at historical trends in your income. For example, an increase in gross income over the past five years will have a positive impact on the valuation, while a downward trend in income may serve to devalue the business.
As with real estate, business is all about location, location, location. Your company’s location is a major factor in its value. If you have an incredibly innovative idea and a fantastic business model, it may not mean much if you are in a location with little potential to grow or succeed. Conversely, if your business isn’t that successful, but you are in a prime location, this can be a major positive when it comes to valuation.
When it comes to business valuation, the concept of concentration can also be viewed as diversity across a wide variety of factors in your business. For example, client concentration can be a significant factor in the valuation of a business. If your business is doing very well but only has a couple of key clients, this would have a negative impact on the value of your business since the loss of one client could potentially be ruinous for the business. On the other hand, an extremely diverse client base would be a positive factor. Similarly, product concentration and market concentration can also be major factors in valuation. If you only sell one product, or your products only appeal to a very specific market segment, that is not considered as valuable as a company that successfully sells diverse products and appeals to a diverse market.
5) Staff and Management
What kinds of employees will a buyer be inheriting if they purchase your business? A skilled staff and effective, reliable management team can have a strong impact on the value of your company.
Your company’s reputation and goodwill within your community can be incredibly valuable. It can be relatively difficult to place a number value on this type of intangible asset, but it is nonetheless incredibly important. An overwhelmingly positive reputation could significantly boost the value of your company, while a negative reputation could be detrimental to your prospects for selling your business.
If you are interested in buying or selling a business, there are numerous factors which you must consider when it comes to the value of the company being bought or sold. Contact the Trembly Law Firm and let us guide you from start to finish throughout the transaction and work to protect your best interests.