Valuation Factors

Valuation factors

The factors that affect business value can be quite varied. Some of the main valuation factors that can affect business value include the following:

Profitability
Market share
Scale
Barriers to entry
Management
Sector
Business climate

Profitability & Valuation

Profitability can be a key factor in business valuation. The extent of profits and their ability to recur can be attractive for investors, if they can grow significantly or be maintained at sustainable levels into the future. Another element to be considered is the level of profits that may be needed for future business requirements such as working capital, capital expenditure, or debt servicing. Such financing requirements can impact on profits as well as not be totally evident from the financial accounts of a private company.

Companies that have less disposable income, or

lower free cash flows would tend to be less attractive to investors, and therefore be less valuable businesses.

Market Share

If a private corporation has a strong position in its chosen niche, then it may be more valuable. Investors prefer businesses with strong market shares because they tend to be more established and command a certain brand presence that makes it more diffiult for a competitor to dislodge.

Scale & Business Value

Scale is another factor than can affect business valuation. Businesses that extend across multiple territories frequently have sophisticated systems of control, distribution, management, and marketing. Frequently, overheads can be centralised and economies of scale can be applied. Mass production can save costs in terms of location, purchasing, and investment in innovation.

Barriers to Entry

One of the most effective barriers to entry can be established at quite low cost, and provides the equivalent of a monopoly right is to have brands, logos and trade marks protected. Investors, especially venture capital investors, like to see a good protection strategy adopted to protect market positions. The reasons for this include: -

trade mark registration obtains monopoly rights,
it stops copying,
it blocks compatitors,
it expands the territory, beyond the factory gate.

Management & Valuation

The skills of the management team can affect alue. This relates to strategic positioning, policies, procedures, and vision for the future.

Sector & Corporate Value

The particular sector involved can affect value. Some sectors may be mature, or be in the process of being replaced by new technologies. This affects the growth environment for such companies, and growth affects business valuation, particularly from an investors point of view.