Valuing a business is a complex undertaking. In part, this complexity lies in business valuation being a subjective process: the person conducting the valuation determines the company’s value. Adding another layer of complexity is the fact that the business valuator has no choice but to assume all the information provided is correct and accurate.
Beyond these two issues, a host of complex variables are considered in the process of valuing a business. In this article, we will identify six issues that must be assessed.
1. Intangible Assets
Intangible assets can make determining the value of a business challenging. Intellectual property ranging from patents to trademarks and copyrights can impact business value. These intangible assets are notoriously difficult to price.
2. Product Diversity
One of the principles of valuing a business is that a business with only one product or service is at much greater risk than a business with multiple products or services. Product or service diversity will play a role in most valuations.
A company that is owned by its employees can present valuators with a real challenge. Whether partially or completely owned by employees, this situation can restrict marketability and, in turn, impact value.
4. Critical Supply Sources
If a business is particularly vulnerable to supply disruptions—using a single supplier to achieve a low-cost competitive advantage, for example—then expect the valuator to take notice when valuing the company. A supply disruption, leading to a delivery disruption, could mean that a business’ competitive edge is subject to change and, thus, vulnerable.
5. Customer Concentration
If a company has just one or two key customers, which is often the situation with many small businesses, this can be a serious concern worthy of a valuator’s attention.
6. Company or Industry Life Cycle
A business that may be reaching the end of an industry life cycle will also face challenges during the valuation process. Examples of such businesses include typewriter repair shops or photographic film developers. A business facing obsolescence usually has bleak prospects, which will be reflected in the valuation.
There are other issues that can also impact the valuation of a company. Some of these include out of date inventory, reliance on short contracts, and factors such as third-party or franchise approvals being necessary for selling a company. The list of issues that can negatively impact a company’s value is indeed long. Working with a merger and acquisition advisor is one way to address these potential problems before placing a business up for sale.
Copyright: Business Brokerage Press, Inc.
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