Make no mistake about it: Analyzing and understanding the subject company’s financial statements is paramount when opining to 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. These other factors are commonly referred to as “key value drivers”.
Key value drivers can range from a business’s culture, 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 that extends across several geographic regions or market sectors may add even greater value than one would expect. This is not just a valuation expert speaking, but a sentiment shared by many sophisticated buyers.
An industry by itself can also be a value driver – particularly if the sector is expanding rapidly. 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 acknowledges when a company distinguishes itself from the herd. For example, does the subject company have a unique intellectual property or unusually efficient supply chain?
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’ employment longevity to be a critical factor 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.
Physical appearance. 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. On the other hand, good organization and a strong “curb appeal” can create value.
Products that pay
When my dad would purchase a business (or a job) he often was attracted to one that he had some familiarity or interest in. Alternatively, when I am working on a valuation assignment, I often look to see if the business has some type of proprietary information or 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.
Conclusion
These are only a few of the many value drivers that our valuation team considers to determine value. If we can be of any assistance to 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 the above phone numbers. You can also email our office at msgcpa@msgcpa.com for immediate assistance.