The Complexities of Valuations

A lot of training and experience goes into quality business valuations. A variety of complex factors are involved. Plus, there are certainly some subjective elements. That means that one professional’s valuation may be different from the next. Let’s take a look at some of the factors involved when it comes to achieving an accurate valuation. 

Intellectual Property

Determining the value of IP or other intangible assets can be difficult. If the business in question has trademarks, copyrights and patents, it can be far more challenging to properly assign a value. 

Products and Services

Diversity of products and services offers creates multiple streams of income which reduces market risk. If a company has a lot of product/service diversity, a higher multiple is often applied. The same is true for companies that have only one or two key customers. Lack of customer diversity can bring down overall values. 

Employee-Owned Companies 

If a company is partially or completely employee owned, it can lower its marketability. Many company owners do not realize that employee stock ownership plans (ESOP) can change its overall value. If considering any form of employee ownership first consider phantom stock, but in any structure insure that you as the owner have drag along rights meaning that minority shareholders cannot interfere with your operating or selling the business.

Life-Cycles and Supply Chains

In some cases, a business is nearing obsolescence due to normal wear and tear or advancements that have taken place. We often see this in low tech companies that have been operated by the same ownership for decades. It should come as no surprise that if a businesses processes, equipment or product/service mix is near the end of its life cycle, this will raise potential issues during the valuation process. On a similar note, could the business be susceptible to supply disruptions? If a business is assessed as vulnerable in that area, it could also lower an overall multiple/valuation amount.

Excess / Expired Inventory

A business that has excess inventory requires special analysis as this asset is not required to generate the seller discretionary cash flow being generated.  Sellers should either liquidate the excess, add it’s value at landed cost to the sale price, consign to the buyer or offer discounted rates to normalize inventory levels.  In the instance of expired or stale inventory buyers are not willing to pay for inventory that they are not likely to ever sell.  In this case it is usually best to dispose of the unsellable inventory.

Accuracy of Data Received

Of course, the person handling the valuation must rely on the accuracy of the factual information they receive. If the numbers are incorrect or incomplete, the valuation will not be an accurate reflection of the companies value.

These are just a few examples of the list of issues that can impact a business valuation. If you’re trying to get an idea of what your business may be worth or if you ‘re wondering what factors might impact your valuation, reach out to our team. We’d be happy to discuss this in greater detail. 

Copyright: ENLIGN Business Brokers, Inc.

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