How to Take Charge of Your Business Valuation: 9 Factors to Consider

Posted by on Friday, February 19th, 2016 in Uncategorized

How to Take Charge of Your Business Valuation: 9 Factors to Consider

If you are a serious business owner, chances are you have a figure for the market value of your business. But, most times, the owner’s idea about their enterprise’s market value is born from estimates coupled with emotional attachments to the business, which sometimes results in figures that are way above the most utopian aspirations.

The truth of the matter is that at the end of the day, business valuation remains a subjective undertaking. The market value of your business ultimately comes down to how much someone is willing to fork out for it.

But, if you are to be in control, and you should be, you have to know what your business is worth. Any business owner trying to understand the value of their business should consider the following factors.

 

 

1. The Type of Business

No matter how long you have worked on growing your company, some businesses just can’t be as valuable as others. It is more about the nature of the business than the individual enterprise. To get an idea of the value of your business, the first thing to consider is how much businesses dealing in the same niche sell for.

 

 

2. Background of the Business

Your history heavily comes into play when determining your business’ value. Your financial performance over the years indicates a trend that can either add or subtract from your market value.

Unfortunately, there is nothing you can do about your company’s history apart from drowning it with today’s good performance.

 

 

3. The General Economic Outlook

Companies clearly lose value during times of economic turmoil. This is when the stock value for most businesses falls and people sell low. The best way to handle this factor is to understand the difference between a stable change, and a fluctuation due to a volatile economy. When valuing your business, do not measure it against brief economic highs or lows.

If you are planning to sell your business, it would be prudent to wait out any sudden economic valleys.

 

 

4. Potential For Growth

A good business valuation should consider whether there are areas of your business that you haven’t ventured into. Having room for expansion adds to the value of your business. It also matters how easily that expansion can be made.

Starbucks started out selling coffee beans, then expanded into brewing coffee, then added all sorts of foods as well.

The expansion is not just product-wise. It is also important to look at geographical expansion. Does your business have an untapped market in other cities, states, or even countries? Back to the Starbucks example; coffee is taken everywhere- in the whole world. A business with such room for growth comes with high value.

 

 

5. Reliance on the Founder

Sometimes, you don’t only own your business but you are the business itself. If the business changes hands, it dies with your departure. The market value of your business depends on how much of a pillar you personally are to its existence.

If you are the owner of, say a consultancy and your name is in the business name, your face is on the brochures, on your website and on your social media accounts, its value plummets off a cliff once hands are switched and you are no longer associated with it. It is of value to you and might be raking in huge profits, but it is of no value to someone who isn’t you.

 

 

6. Ability to Borrow Against Assets

A social media startup in the garage by two teens has no assets against which they can borrow. Even if the startup is promising, just this factor takes away some market value off of the business. A business with assets like land, property, and equipment which can be used as collateral by money lenders bears a high value.

 

 

7. Business Reputation

How clean is your business in the eyes of the public? Is it one that that is known for environmental destruction? Or perhaps there is an obvious disregard for customer service? Any bad aspect that taints your image to the outside world subtracts from the value of your business.

 

 

8. Prevailing Legal Atmosphere Around Your Business

Legal mayhem like lawsuit by clients, the government, or competitors for one reason or another, work to reduce how much your business is worth. If you are thinking about selling your business, you might want to clear the legal air around it.

 

 

9. Key Personnel

The kind of people running and working for your company have an impact on how much you can sell it for. The higher the qualifications and experience of the key people, the higher market value it commands.

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