Crunching numbers from financial statements should be enough to provide a realistic picture of what a company is worth, right? The data says no! Market research and our experience in the M&A market indicates that a company's value is based on the financial performance and the company's specific risk factors.
The primary factors that influence risk are called value drivers. Below you will find a more detailed look at a few of the top value drivers.
Industry Position – A company’s value increases when its associated industry is expanding, and its value decreases in any of the following situations: its industry is constantly fighting technical obsolescence; its industry involves a commodity subject to ongoing price wars; its industry is severely impacted by foreign competition; or its industry is negatively impacted by governmental policies, controls, or pricing.
Geographic Location – A company is worth more if it is located in states or countries that have a favorable infrastructure, advantageous tax rates, or higher reimbursement rates. A company with access to an ample educated and competitive work force will also enjoy increased value.
Management – A company's value is boosted with low turnover in management and a solid second-tier management team comprised of different age levels.
Facilities – A company operating profitably at 70 percent capacity is worth more than a company currently near capacity. Equipment should be up to date and any leases, either equipment or real estate, renewable at reasonable rates.
Products or Services – A company is worth more if its products or services are proprietary, are diversified with some pricing power, and have, preferably, a recognizable brand name. In addition, new products or services should be introduced on a regular basis.
Customers – A company is worth more if there is not heavy customer concentration, but rather recurring revenue from long-time, loyal customers, as well as from new customers created through a regular and systematic sales process.
Competition – A company not contending head to head with powerful competitors such as Amazon or Walmart will command a higher value.
Suppliers – Finally, a company is worth more if it is not dependent on single-sourced key items or items available from only a limited number of suppliers.
While this is nowhere near an exhaustive list of risk factors that contribute to a valuation, it is a good starting point for any business owner looking to build value in their company.