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Beyond Financials: A Look at Key Valuation Drivers

Posted in Business Valuation, on Jul 2024, By: Mark S. Gottlieb

Make no mistake about it: Analyzing and understanding the subject company’s financial statements is paramount when opining on value. However, when you start “peeling the onion,” other factors play an important role.  This is why you can value two similar businesses simultaneously and arrive at different values.

Key valuation drivers range from a business’s culture to tangible assets and/or intellectual property. The following provides just a few that should be considered beyond a company’s financial composition.

Customers & Competitors

Dependency on a few or limited customers will almost always make a business vulnerable.  In other words, a diversified customer base is almost always preferable.  A customer base extending across several geographic regions or market sectors may add even greater value than expected.  This is not just a valuation expert speaking but a sentiment many sophisticated buyers share.

Industry

An industry by itself can also be a valuation driver – particularly if the sector is expanding rapidly, like AI. Business analysts are often attracted to startups in a young, hot industry – rather than one solely dependent upon organic growth.

Keep in mind that you can’t use industry as your sole determinant of value.  Value and the valuation process are acknowledged when a company distinguishes itself from the herd.

Internal assets

Favorable internal factors may also drive a company’s value. Although these factors may not be as clear as financial performance indicators, one should assess the following attributes when determining value:

Management talent: Is the subject company’s management team capable of running the business successfully without its current owner? Have managers signed contracts or been offered incentives to remain on a long-term basis? Many consider key employees’ longevity to be critical when determining value.

Employee tenure and morale: Are there many long-term employees, or is your business plagued with high turnover? Has the company clashed with employee unions or been hit with discrimination/employment suits? It goes without saying that a business with a happy and committed workforce can be a great asset and credit to value.

Curb Appeal: Aside from key managers, are your office, service, and production facilities clean and well-maintained? Are your website and social media pages up-to-date and easy to navigate? Is your software and hardware current and effective?  A dated company logo, poorly maintained database, or even worn reception-area furniture tells customers, clients, employees, and vendors that your company has seen better days.

Products that pay

When my dad would purchase a business (or a job), he often was attracted to one that he was familiar with or interested in. Alternatively, when I am working on a valuation assignment, I often look to see if the business has some proprietary information or a special manufacturing process that potentially offers higher profit margins and a unique marketing story.

Other items that are considered to increase value are growth potential, market exclusivity, strong brand recognition, access to capital, branding, and market position – to name a few.

These are only a few of the many value drivers that our valuation team considers to determine value. If we can assist you or your clients when valuation is an issue, please feel free to contact our office.

For additional information on this or any other issues related to business valuation, forensic accounting, or litigation support, please feel free to contact our office at 646-661-3800.