Business Valuation : Key Drivers of a Business Valuation
Business Valuation: Valuation of business plays a very vital role, therefore a business owner or individual may need to know the value of a business. Primary purpose of business valuation is preparing a company for sale, there are many other purposes of business valuation like Shareholder disputes, Financing, Mergers etc.
Key Drivers of a Business Valuation :
- i) Growth Prospects : This factor looks at how much potential the business has to grow in the future. This aspect of the valuation may consider the company’s growth prospects as a business regardless of its industry and based on the company’s unique potential, and it may look at the company’s potential for growth based on its industry. Thus, if company have a business model with high growth potential, or if similar segment of business that will likely see significant growth, this could be increase the value of the business.
- ii) Earnings Trends : Income is a major factor in the valuation of any business. Particularly, someone appraising the value of a business will look at historical trends of company’s income. For example, an increase in gross income over the past five years will have a positive impact on the valuation, while a downward trend in income may serve to devalue the business.
- iii) Location & Diversity : As with real estate, business is all about location .Company’s location is a major factor in its value. If Company have an incredibly innovative idea and a fantastic business model, it may not mean much if you are in a location with little potential to grow or succeed. Conversely, if Company’s business viewed as diversity across a wide variety of factors in the business. For example, customer concentration can be a significant factor in the valuation of a business. If company’s business is doing very well but only has a couple of key customers, this would have a negative impact on the value of the business since the loss of one customer t could potentially be ruinous for the business. On the other hand, an extremely diverse customer base would be a positive factor.
- iv) Team and Management Staff Members : A skilled staff and effective, reliable management team can have a strong impact on the value of a company.
- v) Goodwill / Reputation : Company’s reputation and goodwill within peer industries can be incredibly valuable. It can be relatively difficult to place a number value on this type of intangible asset, but it is nonetheless incredibly important. An overwhelmingly positive reputation could significantly boost the value of a company, while a negative reputation could be detrimental to company’s prospects for selling business
Above Key Drivers may have +ve impact on Business Valuation. While some the factors are outside Company’s control and may affect the timing of Company’s sale, Company can take necessary steps to keep their business as valuable as possible.