8 Factors that May Impact a Business Valuation

EFFECTIVE MANAGEMENT IS KEY

by Contributor

Image credit: geralt at Pixabay

(Mar. 20, 2019) — Assessing the value of a business, popularly known as business valuation, depends on many different factors. In fact, there are external and internal factors that may influence its outcome. External factors are the outside influences that affect the ability of a business to achieve its main goals and objectives while internal factors are those that impact the operations and performance of a business. To better assess the value of your business, here are the most common factors to consider.

Growth Prospects

This factor determines how likely your business is to grow in the future.  Essentially, if your business has high growth potential, it can add value to the company. If it is too low, it can have a negative impact on the business. However, if your business had great revenue growth in the past but is now declining, such change can also impact the value of your business negatively. Only consistent revenue growth can ensure increased value for your company.

Revenue Stream

The revenue stream basically represents the money that your company receives from the goods or services that your customers pay for. There are two common types of revenue: one-time revenues and recurring revenues. One-time revenues are those that customers pay once for a good’s value while recurring revenues are those that customers pay over and over to keep receiving the same value. Among the two, recurring revenues apparently have a positive impact on a business. An inconsistent revenue stream provides no value for the company and even destroys it, which makes it the “destroyer of value.”

Staff and Management

The people who work for you play an important role in the value of your business. For potential investors, it is important that your employees are skilled, reliable and trustworthy. The way you manage your business and your people are also factors that investors consider when thinking about investing in your company. If you have the staff and management that investors love, it is likely to add value to your business.

Level of Debt and Other Existing Liabilities

Debt and liabilities create a negative impression on anyone interested in your business. To determine if you are able to pay all your liabilities, you have to know what your debt ratio is. This also shows how many assets you have to sell to pay off your debts. If you have more debt and liabilities than assets, your business value is very low. Nonetheless, there are many personal loans online with instant approval to refund the company or its debt. Once you pay off all your debts and attain more assets, the value of your company will eventually grow.

Company’s Core Business

A company’s core business pertains to its main activity or business processes that the company focuses on. Significantly, the success of your business does not only depend on the performance of a single department. It also depends on how well you manage to coordinate all the departments and all business activities. To create a value out of your business, you have to find your competitive advantages and use them to improve business operations and get ahead of the competition. If you maintain a strong and successful core business, the value of your company will be apparent.

Competitive Environment

It is important for every business to know what their competitive environment is like. You have to know how many competitors you have and what exactly they are doing. If you have a big company, you are likely to have local and international competitors. Your competitive environment may also affect the price of your goods. The more competitors you have, the lower the price of your goods should be since price is one of the factors that influences people’s buying power and behaviour. Depending on your pricing strategy, a heavy competition can add value to your business. If the competition does not favour your business, you have to study your competitive environment more and find out what advantages you have against your competitors.

Market Demands

Market demands are the number of goods and services your customers are willing to buy. Goods that have high market demands are basic goods like food, clothing and housing products. People demand these goods, which are also called economic goods because they need them for their daily lives. You don’t have to convince people to buy these products because they are necessities. If your goods or services are not in this category, you have to do more marketing and advertising with lots of tools to convince people to buy your products. If your business has high market demands, you are also likely to have more profit which adds value to your company.

Size of Customer Base

The size of your customer base also helps determine the value of your business. Your customer base consists of customers that have purchased and used your products or services. Some business owners include their target market or target customers in their customer base. As your business grows, you will have recurring customers and loyal customers which you have to keep. Simply put, if you have a large customer base, you will also have higher sales and a bigger value for your business.

 

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