Factors affecting the actual valuation include:
1. For what purpose is the business actually being valued?
- For specific examples click here.
- Is the business a trading business or investment?
- Is the Business a going concern?
- Is the Business being wound up or in an insolvent situation?
2. What underlying tangible assets does the business own
- Is there substantial tangible assets like freehold properties?
- A lot of businesses simply have no valuable tangible assets like this.
- Most businesses do have intangible assets like goodwill
- Also, is the business a trading business or investment business
3. What is the age of the business?
- The older and more established the business is then the more credible is the value.
- For example, for business start-ups it will be a little difficult to convince buyers of the value.
4. What are the sustainable profits?
- These are profits that have been stable over a period of years.
- We would suggest that a period of at least 3 years is considered
- Remember, a buyer is looking for and purchasing future profitability.
Other factors which may affect the commercial value of the business may include:
1. Day-to-day involvementof the Business Owners
- One of the most important, if not the most important, factor that affects the value of a business is how the business works without the owners’ day to day involvement.
- A Business is much more valuable to a potential buyer if the owners of the business are not involved on a day to day business because the business basically runs itself and the potential purchaser does not have to put anyone in or personally get involved too deeply in the business.
2. The general economic climate and the state of the particular industry in which the company trades and the position of the business within it.
- Obviously, these factors involve a certain amount of judgement.
3. Management stability
- The stability and importance of key employees and management is very important. If the Business relies heavily on one particular employee, because for example that employee is responsible for the majority of sales and sales relationships then should that employee not be happy or be threatening to leave and take the customers with him then that would be disastrous to the value of a business.
4. Systemisation of the business
- This is a really crucial issue. If there are no systems in place that a new owner can follow then a disaster is waiting to happen and indeed may make the business potentially unsaleable.
5. Relationships with customers and suppliers
- It is often key business relationships that provide the most value to a business. If the business relies on a few major customers then there is a higher risk attaching to the business than one where there is a good customer diversification spread.
- The more risks from a purchaser’s perspective then the lower the value of the business. To make business less risky and therefore more valuable then ensure that the business is fully systemised and that key business relationships with customers, suppliers and employees are protected in some legal format such as contracts.
7. Legal Comfort
- The legal and commercial due diligence process is very important and the comfort given by the resulting warranties and indemnities can make a big difference to the price a willing buyer will pay. The better the warranties and indemnities then the higher the value and the lower the risk. No warranties then the lower the value and a much greater risk of a buyer losing all of his investment.