Factors That Impact your Valuation

There are many business valuation factors which can come into play which can impact the overall outcome of an investment. It is important to recognise those potential factors, and understand in what way they may impact your valuation, and whether extra considering should be given to them based on the specific circumstances of the business you are valuing.

EBITDA

This is the calculation of a company’s value based on earnings before interest, taxes, depreciation and amortization. This eliminates non-operating effects unique to a business and is an important factor in the purchase or sale of a business (partially or wholly).

Size

The size of a business can have a significant impact upon the valuation as a whole, and is a factor within the EBITDA calculation. The size of a company can determine not only the value as a whole, but how attractive that company may be for potential investors.

Revenue (and trends)

Is the revenue trending upwards or downwards? It can be a determining factor for the level of risk an investor may be taking on with the business. It may be that the investor looks at the business as an opportunity to inject new life into it and turn it around, or they may be looking to ride the wave upwards. The trends in revenue will often differ depending on the personal circumstances of the investor.

Growth Potential

Future growth is of great interest to potential investors. If the business is stable it may also help raise the valuation, but if the growth is shrinking visibly, then it may be difficult to raise a high valuation.

Current Talent and Management

It is not uncommon, especially in finance and tech for companies to be bought purely for the employees and talent that are currently working there. They may have specialised knowledge that another business wishes to obtain, and therefore they will buy the business for that purpose. Therefore, for their specific needs, the business may have a much higher inherent value than to anyone else.

Location

As is the case with properties, the value of a business can be impacted by where they are located. This can be due to taxation implications of the location, as well as the assets within the business and where they are located (IE - a head office in San Francisco is going to have a higher asset value than an office in the countryside).

Competition and Advantages over Competition

It may be that the business has a specific intellectual property piece which gives them an edge over the competition. In this case, it may give investors an opportunity to use the purchase to enter the market, or it may give competitors an opportunity to buy themselves into market dominance. In these scenarios, the prospective buyer may have to value the company higher.

Reputation

An intangible asset, the reputation when positive can have a resulting higher valuation. In contrast, if the business has gone through a period of negative press, or has amassed a bad reputation, then it can cause the valuation to be lower, as they may need to reduce the asking price in order to attract buyers.