It’s common for business owners to correlate valuation with financial-driven metrics such as net income, EBITDA, or cash flows. However, there are lesser-known non-financial drivers that should be given equal consideration when evaluating how much a business entity is worth.
Here are four universal valuation drivers that your business can leverage to increase its value.
- Owner Involvement: Founders or owners are often heavily involved in a company’s operations. While their involvement may have been beneficial for the company in the past, it presents several risks for prospective buyers. For instance, heavy owner involvement might cause a prospective buyer to worry that the business won’t perform or operate at the same level after he or she exits the company. Making sure the business can continue its current operations without the owner’s involvement is important for reducing risk and increasing value.
- Management Experience and Quality: Along those same lines, prospective buyers view an experienced management team as a positive valuation attribute. A strong team of individuals who have been with the company for years, possess a variety of skills, and are committed to its future success help indicate to prospective investors that the company will continue to successfully operate after ownership’s departure. The stronger the management team, the less risk associated with a change in ownership, and the higher the value of the business tends to be.
- Business Concentrations: Due to their size, many private companies tend to be highly concentrated when it comes to customers, vendors, products, or geographic locations. Such business concentrations present potential risk because the impact of losing a customer, vendor, or location would be more substantial than if the company was more diversified. While some concentrations are more difficult to overcome than others, business owners should try to diversify as much as possible to reduce risk.
- Strategic Vision: Buyers are normally not content with flat cash flows and like to see some sort of growth potential in what they are buying. They want to be able to identify the catalysts for growth within the business and leverage them in order to drive expansion. Owners and management should have a clear strategic vision and business plan that indicate how the company intends to grow and how such growth will impact sales and the bottom line.
There are many more intangible value drivers in private companies in addition to those listed above. The earlier a company is able to leverage these drivers, the more perceived value it can create from a buyer’s perspective.
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