Company and External Factors Influencing Business Valuation

As a mergers and acquisitions intermediary, one of the most contentious discussion topics I encounter when meeting with a prospective business seller relates to business valuation. Most potential sellers have a preconceived notion of what their businesses are worth rather than knowledge based on specific value drivers to support a realistic assessment of value.

The following list represents some of the business and economic factors that can have a significant impact on business valuation. Strategic and private equity buyers will assess these and other factors to determine the upside of an opportunity and to determine the degree of risk they perceive to be associated with a potential acquisition target. It is precisely these factors that a buyer uses to determine what valuation multiple to apply to their assessment of your business' normal earnings or cash flow generating ability in order to make an offer.


Company-Controlled Factors Influencing a Business’ Valuation

Larger revenue size Smaller revenue size
Strong revenue growth rate Declining, flat or low revenue growth
Higher, consistent gross margins¹ Low, inconsistent gross margins¹
High preponderance of negotiated sales opportunities High preponderance of bid sales opportunities
Higher then average industry operating margins¹ Low industry operating margins¹
Strong, diverse management team Company primarily dependent on the owner
Consistent history of profitability Inconsistent profit history
Strong, sustainable, predictable cash flow Weak, unpredictable cash flow
Repeat customers One-time customers
Strong, profitable order backlog Low, declining-profitability order backlog
Niche products or services Commodity products or services
Strong barriers to market entry Low barriers to market entry
Proprietary products or technology No proprietary products or technology
Low foreign competition exposure Significant foreign competition exposure
Large market potential Limited market potential
Low annual capital expenditure requirements High annual capital expenditure requirements
Low exposure to technological change Significant exposure to technological change
Multiple, strong sales distribution channels Single, weak sales distribution channel
Low customer revenue concentration High customer revenue concentration
Multiple revenue sources (pillars) Single revenue source (pillar)
Strong industry market share Low industry market share
Strong, recognizable brand identity Minimal brand identity
Well-maintained equipment Significant deferred equipment maintenance
Modern, highly productive equipment Outdated equipment
Not a highly regulated industry Highly regulated industry
Audited financial statements Compiled financial statements
Nonunion workforce Unionized workforce
Written and assignable customer agreements Unwritten or not assignable customer agreements
Written contingency plan in place No contingency plan
Key employee agreements, noncompetes No or weak agreements with key employees
Written business plan No business plan
Recent legal due diligence review No recent legal due diligence review
Clean balance sheet Balance sheet cluttered with obsolete and personal assets
History of achieving financial projections Inconsistently meets financial projections

(1) For companies in general and for the specific industry


External Factors Influencing a Business’ Valuation

Merger and acquisition market is active Merger and acquisition market is down or flat
Company is in a growing industry Company is in a mature or declining industry
Economy is growing Economy is recessionary, flat or hardly growing
Interest rates are low Interest rates are high or rising rapidly
Strategic buyers have cash on hand Strategic buyers are holding onto their cash
Private equity buyers are investing Private equity buyers are not buying/investing
Transaction financing sources are lending at higher turns of EBITDA Transaction financing sources are lending at much lower turns of EBITDA
Transaction taxation rates are low Transaction taxation rates are higher

Some of the above value drivers are more important than others. Many of these can be analyzed and addressed as part of a comprehensive “exit planning” process.

If you have any questions or would like to confidentially discuss how these factors relate to your business’s valuation, please contact me for a free consultation.