18 November 2024: Business Valuation: What Drives It?
Over the past two weeks, we’ve discussed various reasons a business owners should know what their business is worth and some of the purposes of a business valuation. This week we look at some of the components that drive a business’ value.
WHAT WE’RE LOOKING FOR: Healthcare, Business and Residential Services: Home health, environmental, pools. EBITDA >$3M; U.S/Canada.
in**@Wo**********************.com
Understanding these components will help business owner determine what they might be able to do to increase their business’ value and where in their business’ operation they should focus to get the best bang for their buck.
• Financial Performance
The financial performance of a business is, of course, a primary indicator of its value. In many cases – especially in the case of smaller businesses – it’s the main indicator. A business’ financial performance includes revenue, profit margins, cash flow, and growth trends. A business with consistent and growing financial metrics is typically valued higher. Potential buyers look for businesses with strong earnings before interest, taxes, depreciation, and amortization (EBITDA) and strong and growing adjusted earnings as both reflect the company’s operational efficiency.
• Market Position
A business’s position within its market significantly impacts its value. This encompasses market share, brand recognition, and competitive advantages. Companies that dominate their market or have a unique selling proposition (USP) that sets them apart from competitors are generally more valuable. Additionally, businesses in growing or stable industries are often valued higher than those in declining markets.
__________________________________________________________________________________
Are you a business owner? A Realtor? A business broker? Are you looking for a business to buy? Do you have questions about the selling or buying process, the valuation, marketing the business, deal structure, financing or some other business issue?
You can find the answers in The Brokers Roundtable℠. Join seasoned business brokers, commercial real estate experts, valuation specialists, financing professionals, attorneys, accountants and all the other talent associated with what we do.
Sign up for a 90-day test drive at The Brokers Roundtable℠. Access the talent – or just see what’s going on in our industry!
___________________________________________________________________________________
For example, over the past couple of years, we’ve seen surging demand from buyers for service businesses, primarily those in the “trades”. Less so for businesses dependent upon government contracts, a result of the growing complexity of navigating the labyrinth of road blocks and regulations of qualifying, permitting and compliance (though this may change under a new administration).
• Customer Base
The size and loyalty of a business’s customer base are crucial value drivers. A diverse and loyal customer base reduces risk and ensures steady revenue streams. Businesses with high customer retention rates and strong customer relationships are more attractive to buyers.
Diversity is key; and we mean that is the sense of customer or client concentration (rather than the woke sense of DEI).
Long-term contracts or recurring revenue models can significantly enhance a business’s value. We’re seeing strong demand for recurring revenue businesses – such as managed service providers and subscription software (SaaS) businesses – from private investment groups and search firms.
• Operational Efficiency
Efficient operations contribute to a business’s profitability and overall value. This includes well-established processes, effective supply chain management, and cost control measures. Businesses that can operate efficiently with minimal waste and high productivity are often valued higher. Additionally, having a robust technology infrastructure and streamlined operations can further enhance value.
Any of you paying attention know that there is about to be a major effort in the U.S. in an attempt to impose some level of operational efficiency on the federal government. Getting more done with less – which should be quite doable in the federal leviathon – is a goal most business owners probably have, but are too busy to look seriously at their own operation.
• Human Capital
The quality and stability of a business’s workforce are important components of its value. This includes experienced management teams, skilled employees, and low turnover rates. A business with a strong leadership team and a motivated workforce is more likely to succeed and grow, making it more valuable. Furthermore, businesses that invest in employee development and maintain a positive workplace culture are often more attractive to buyers.
• Intellectual Property and Assets
Intellectual property (IP) and other tangible and intangible assets play a significant role in determining a business’s value. This includes patents, trademarks, copyrights, and proprietary technology.
“Proprietary” is the operable word here. Proprietary assets often represent the proverbial “moat” that presents obstacles to competitors wanting to jump in. Businesses with valuable IP can command higher valuations due to the competitive advantages and revenue potential these assets provide. Additionally, physical assets such as plant and equipment also contribute to a business’s overall value.
• Growth Potential
The potential for future growth is a critical factor in business valuation. This includes expansion opportunities, new markets, and product development. Businesses with clear and achievable growth strategies are more attractive to buyers. Factors such as market trends, innovation capabilities, and scalability also play a role in assessing growth potential.
A not insignificant growth strategy is acquisition opportunities. If your business is in an industry seeing growth, a strong balance sheet is something we often point a buyer to as a way to envision growth through acquisition. Such opportunities enhance business value.
• Risk Factors
Assessing and mitigating risk is essential in determining a business’s value. This includes industry risks, economic conditions, regulatory environment, and operational risks. Businesses that understand risk management and have contingency plans in place are generally perceived to have lower risk and are valued higher. Of course, a business with a diversified revenue stream and a stable financial position will generally enjoy reduced perceived risks and the resultant enhanced value.
__________________________________________________________________________________
Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
• Legal and Regulatory Compliance
Compliance with legal and regulatory requirements is crucial for maintaining and enhancing business value. This includes adherence to industry standards, environmental regulations, and labor laws. Businesses that operate within legal frameworks and maintain good standing with regulatory bodies are more attractive to buyers. Non-compliance can lead to legal issues, fines, and reputational damage, all of which are issues that negatively impact value – and most of which will be uncovered during due diligence.
• Reputation and Brand Equity
A strong reputation and brand equity can significantly enhance a business’s value. This includes customer trust, brand loyalty, and market perception. Businesses with a positive reputation and strong brand presence are more likely to attract and retain customers, leading to sustained revenue and growth. They are also less likely to attract trolls on social media. Additionally, a well-regarded brand can command premium pricing and create barriers to entry for competitors.
A potential buyer will do a great deal of research and due diligence on a potential target using online sources. But not only will buyers thoroughly dissect your business’ online presence, but also your own online presence and, in many cases, that of your employees’. One of our clients recently discovered how damaging this could be when she was alerted to a Facebook post made, in the wake of the just-ended U.S presidential election, by one of her public-facing employees in which the employee attached a vile photo and incredibly vulgar language condemning roughly 53% of the U.S, population, a group that included a fair percentage of the business’ clients.
The Bottom Line
Knowing what your business is worth is important as a matter of course. I mean, what would happen if someone – someone like us – shows up and says, “We’ve got a buyer for your business”? But even if that doesn’t happen, your business, like “Every Business That Doesn’t Fail…” will be sold. The sale may be at your own volition or it may be as the result of events beyond your control.
Most business owners want as much as possible from the sale, but most business owners also have an exaggerated opinion of the value of their business. Not knowing what your business is worth means you have no idea what the proceeds of an eventual – and inevitable – sale will be and whether those proceeds will fund what you imagine your post-closing life will be.
To avoid what is likely to be an unpleasant surprise, get a professional to value your business and then focus on a couple of the value drivers discussed above to increase that value – long before bringing the business to market.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively.
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness #realtor #realestateagents
The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com