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Factors Affecting Business Valuation

Business valuation factors - Company valuation factors

Because businesses operate often in a dynamic environment, a valuation needs to consider many factors. The relevant valuation factors affecting the performance of the business should be considered. The following business valuation factors, even though there are others, are fundamental. Therefore, they need careful consideration in each individual case :

• the nature of the business and its history,

• the economic outlook in general, and especially for the position and outlook for the specific sector,

• role of management, vision, and strategy,

• the book values of assets and liabilities, and the financial condition of the business,

• the earning capacity,

• dividend paying capacity,

• intangible assets and goodwill,

• the size of the block to be valued,

• the marketability of shares in private companies,

• rights attaching to shares, minority interests,

• market share, and strategic positioning,

• risk/reward aspects,

• level of gearing, and

• accounting adjustments.

business valuation factors

Business and Technology Links Ltd. was formed in 1996. It is Ireland's only national online business valuation and trade mark specialist.

Private company valuation is difficult

Valuation of shares in closely held shares in private companies involves detailed consideration of a wide range of relevant factors. However, in valuing a business, certain circumstances will need an approach that may differ from other circumstances. When assessing the fair market value of a company, the roles of earnings versus the underlying assets in determining company value can vary in importance depending on the circumstances.

Analysis of financial ratios can indicate the strengths and weaknesses of a company's financial position. However, business success depends on several factors, many of which are not reflected in a private company's financial statements. This adds to the complexity of financial appraisal and business valuation.

Legal Views of Courts on business valuations

Independent Business Valuation

The Courts see the effects of disputes between shareholders when they have irretrievably broken down. The judges in the courts tend to adopt the following views :

• business valuation disputes between family members should be resolved through mediation,
• the courts are reluctant to engage in valuations of shares in private companies,
• litigation between shareholders on business valuation should only be a last resort,
• when one considers the time, effort, and expense to petitioners and respondents, the costs of the process can significantly affect the shareholders,
• by having an independent business valuation in advance of negotiations is a powerful tool,
• an independent business valuation can help parties to arrive at solutions.

An independent business valuation provides :

• independent grounds for agreement,

• independent views on the business value,

• commercial solutions for negotiations,

• basis for settlement between shareholders.

Because the eonomy is dynamic, so too are the factors affecting business valuation. Factors such as the rate of growth in the economy, the amount of inflation, the need for cash flow to be re-invested either in fixed or working capital affect business values. Interest rates as well as the value of other stocks and bonds can influence business valuations. Scale is another factor. Barriers to entry can also influence a firms worth. Whether the business has any monopolistic powers in buying or selling goods and services, or in intellectual property such as registered trade marks and patents, can also influence business valuation.

Contact us for premier business valuation services in Ireland.

Minority Interests Valuation

Worthwhile Shareholding Valuations

Minority shareholding valuation factors
.
As a shareholder, if you do not hold voting control, then you hold a minority interest in the business. Valuation of minority interests can be affected by the following factors :

• the percentage or size of block of shares held,
• voting rights attaching to shares,
• right to appoint directors,
• exit arrangements for shareholders,
• ability to dilute shareholdings further,
• commercial control, and
• influence on business.

When most private companies are formed, the shareholders adopt quite simple rules (Memorandum and Articles of Association) to regulate affairs between them. In most of these cases, there are too few mechanisms that provide for the treatment of minority interests. This frequently also applies to joint ventures. Where the simple rules are adopted, they often do not apply in certain circumstances. For example, what happens when one shareholder wants to continue in the business and the other does not? Business valuations can take account of such valuation factors on the minority shareholdings. Some examples of the problems that minority interests can face include the following :

• shareholder disputes,

• differing views on the future direction of the business,

• different ability to finance future investment requirements,

• one party gets more income from the business that the other,

• one party wants to retire before the other,

• one party wants to sell their shares.

Need for independent business valuation.

Because we are not aligned with any interested party, our customers are assured that our business valuation services are independent of potential other interested parties. Over a period of time, most businesses develop relationships with their counter-parties. They may conduct other business together, socialise together, play golf together, generate recurring income such as on-going fees. In such circumstances, certain shareholders may have quite close connections with certain suppliers, and certain other shareholders may not have as close connections with the same people.

Some of these relationships can produce potential conflicts of interest, especially for a business valuer. If a valuer is getting say €15,000 per annum from your business, they could be regarded as a connected party from a businessvaluation perspective, and it could be valid to question how committed would they be to the possibility of a sale or change in shareholders, if, as a result, this annual income might be lost? Accordingly, it can be useful to use a fully independent party - who is focussed only on the business valuation, and the commercial issues involved.

Minority shareholding valuation

To counteract such shareholding valuation issues, the minority interest party needs additional powers. For example :

• anti-dilution provisions,

• commercial control over key business decisions,

• deadlock break measures,

• exit mechanisms,

• buy-out arrangements.

In the absence of appropriate terms, the minority shareholder is losing potential value for his or her shareholding. This means that discounts for minority interest shareholdings could apply. If a minority shareholder wishes to protect such position, the best time to do so is at the time of the investment, and to obtain suitable additional terms and conditions in the Shareholders Agreement and Memorandum and Articles of Association of the company involved.

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Last update: 10 October 2006

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