6 Factors that Drive Valuation

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There are many different factors that drive valuation, including things that vary widely, like the status of the market or a given industry. In this article, we will look at six items that don’t vary widely, and matter for every business listed for sale.

Financial Performance

The numbers don’t lie. How the business has performed historically and recently matters. In this era, how a given business responded to Covid and the lockdowns is particularly relevant.

Don’t: make unnecessary capital expenditures to “save on taxes” at the end of the fiscal year. You’ll create a narrative that includes lower net income (which leads to a lower valuation) and burden yourself with assets that may not be relevant or necessary.

Market Position and Reputation

You don’t need to be number one in your market to have a sellable business. But you do need to either hold your position well or be closing in on who is ahead.

You also need to have a good reputation with vendors and clients. That goodwill is something that the buyer is banking on and that you’ll need to deliver to sell your business.

Do: know your competition and their strengths and weaknesses and see if you can adapt your company’s approach to gain ground on them (or put them even further in the rearview mirror).

Operations

Part of what you’re selling in a business is the daily, monthly, quarterly, and annual processes. These processes must be written down somewhere and have a method of being updated and improved. Without a manual for running the business, a buyer can’t be confident in taking over from the seller.

Do: document everything you do and how you do it. If you feel burdened by having to write everything, consider a video alternative like Loom.

Human Resources

There will always be employees who decide that the sale of a business also marks the end of their time there, for whatever reason. Since confidentiality is a must of successful business sales, you’ll need to have done your best to assess who are your best and most necessary team members and the likelihood of their staying, along with contingencies. No business should be hostage to any single employee.

Do: have backup plans in place for every key employee who could leave in a sale so that a buyer can be more assured regarding this issue.

Growth and Risk

One of the first places a savvy buyer will look is for opportunities to grow that the seller has neglected. That could be better strategies for SEO or a slicker website, or it could be expanding sales into a different category that the seller didn’t pursue for whatever reason.

That same profile of buyers will be looking at exposure. Today, one of the worries for buyers and sellers is the role of AI.

Do: Have answers to how AI will affect every part of your business.

IP and Moats

Sellers love barriers to entry because it makes it harder for new competition to enter the fray. Buyers love those same barriers because it makes them feel like their investment is that much safer.

Not every business is built for IP in the product or service itself (think Post-It notes). If you’re not in that type of business, you can create moats and barriers in various systems within your business. Perhaps you develop a proprietary way of sourcing leads, or a leaner system of operations.

Do: Consider creating systems or processes that your competitors can’t duplicate.

Do we have your mind working on ways you can improve your business as you work towards a valuation and a possible sale? Good. Now, give us a call so we can brainstorm together.