Understanding business valuation factors

What can affect a business' valuation?

Although a great deal on price is likely to be the main goal for both buyers and sellers, external factors not necessarily under an owner’s control can have the most impact on a business’ valuation.  

Our impending exit from the EU is one such issue, and along with ever-increasing business rates and the rising costs of employment, boosting the value of British businesses is a challenging process.

So what can affect a business’ valuation? Here are a few factors that have an influence, both positive and negative.

Circumstances of sale

If circumstances are such that the sale is forced, business value can be considerably depressed. Whether it’s for health reasons, or the business is experiencing irresolvable financial issues, selling in such a pressurised environment can easily lead to a business owner accepting an early speculative offer, when under different circumstances they would be intent on negotiating a higher price.

Cash flows and financial presentation

Given that a poor cash position and a shortage of working capital often causes business failure, presenting an operation that has strong cash flows and reliable profit projections offers serious potential for prospective buyers. Using effective and coherent systems to present the facts and figures also positively affects business value, in contrast to operating with poor internal controls and haphazard procedures that produce little meaningful information.   

Potential for growth

A key factor in any business sale is the potential for profitable growth. Healthy margins that protect profits day-to-day, and prepare the company for potential market volatility, increase its stability and overall appeal. Patterns of consistent growth, and reaching set targets and objectives on a regular basis, demonstrates the business’ future potential and positively affects its value.

Asset values

Owning tangible assets, such as machinery, office equipment, property, or vehicles, positively impacts value, enabling a business to leverage them to secure vital funding if necessary. If only intangible assets are held, the business is reliant on future profitability as the driver for serious buyers to invest.

Management stability

Stability of the management team as a whole underpins the success of a business sale, and provides reassurance to new management that it will continue to function with no loss of momentum. If the business depends excessively on the current owner for its smooth running and continued success, this presents a significant risk to buyers.

Age of the business

New businesses have to rely on future sales and profit projections when it comes to value, or on new products or services to disrupt an existing market. This contrasts with more established businesses that have a proven track record and can confidently produce hard facts and figures to support their claims to prospective purchasers.

Economic climate and state of the industry

The wider economy, market demand, and state of the industry in which the business operates, all influence value, but specific circumstances can also make a significant impact. Currently, the ongoing speculation about the potential impact of Brexit on UK business has caused many companies to operate in a bubble of uncertainty. This can significantly bring down values due to lack of investment.  

Risk

Risk is a huge issue in the buying process, and good relationships and stable contracts with suppliers, employees, and customers, reduce the perceived risk for prospective buyers, so boosting a business’ value.

For more information on business valuation, please contact our expert team at Real Business Rescue. We’re a major part of Begbies Traynor Group, the UK’s largest professional services consultancy. We provide reliable, independent advice, and also offer free same-day consultations with more than 100 offices around the country.