Summary
Many factors contribute to the value of a business. Four critical aspects that often drive valuations include the market volatility of a geographic region or economic area, the types of assets a business has, the projected growth of a particular firm, and its size.
What Determines Your Business’s Value?
Table of contents
What four factors impact your business valuation?
For many business owners, an appraisal of the company is sought when a potential sale or exit of the business approaches. For others, a business valuation is obtained to settle partnership disputes, divorce proceedings, property distributions, or tax purposes.
A business appraisal, or business valuation, reflects the current economic value of an enterprise. Knowing how much a business is worth is vital for a business owner. Why? Because it is the only true metric that enables you to determine what progress the firm has made in the past and can make in the future.
But because many companies find it easy to put a higher mental valuation on their company, it is easy to use an overly optimistic amount to assess the worth of a business. For this reason, it is especially important to consult a competent and experienced business appraiser, like those at Business Appraisal FL | GA.
Before understanding how to appraise a business, however, you should recognize the many factors that drive valuations in the first place.
Four different factors impact a business valuation:
1. Market volatility in the geographic areas where the industry’s major companies compete
Market conditions collectively impact the feasibility of a business. This is because the prices of similar assets or businesses that have been recently sold or are in the process of selling indirectly contribute to the valuation of other businesses in your area or industry.
Macro conditions like interest and exchange rates can greatly impact the general trading climate that your business exists in. Interest rates impact every industry. Additionally, varying foreign exchange rates may affect how certain industries trade with businesses overseas. It also affect the profits that such businesses experience as a result.
Technologies could also greatly impact the demand for a particular business or service. Additionally, such innovations may increase or decrease the need for substitute or complementary products to your own.
Overall, various changes and improvements within the market landscape may impact the general sales of businesses, which will then affect the valuation such businesses obtain.
2. Composition and Productivity of assets
Assets impact the valuation of a business. The most obvious, hard assets like merchandise, inventory, equipment, and properties directly affect a business’s valuation.
What many business owners overlook, however, are factors that contribute to the value of the company’s revenue or margins but that are not necessarily physical in nature. These assets often include intangible items like intellectual property, patents, licenses, and brand recognition that add to their value.
But intangible assets can even include the attitude of a business clientele. Goodwill, or the value of a firm’s customers, is also related to a solid product reputation, experienced personnel, and favorable location.
Expert appraisers like those at BA FL|GA|HI often consider all kinds of assets when evaluating a business’ worth. That’s because such factors necessarily impact the potential for growth that a business may experience.
3. Forecasts of growth in company revenue and company margin
Prior annual earnings may also contribute to a business’ forecasts of growth. Which, in turn, directly affects the potential value of a business. Appraisers often employ the P/E ratio, or multiples of profit, a method used to evaluate a business’s worth with an established annual record.
Expert valuators use this method to inform forecasted return growth through prior profits. A higher P/E ratio would be used for companies with high forecasted return growth or repeat earnings. For example, if the P/E ratio of three is used for a company that makes $500,000 in post-tax earnings, then the enterprise would be valued at $1,500,000.
4. The size of your company
Investors will pay up for higher sales and profits. A company with $50,000 in EBITDA will receive a lower multiple than one with $5,000,000. As a company moves in size from a job to an enterprise, its P/E ratio will expand too.
Although the calculations used to reach the valuation are straightforward, expert valuators like BA FL|GA|HI can suggest the correct number for your P/E ratio. This is because the P/E ratio often varies from business to business.
Startups, for example, often have high ratios because they are high-growth companies. More established companies, on the other hand, like auto shops or local insurance agencies, experience less drastic growth and will have a lower P/E ratio.
Company Valuation Variables Conclusion
Many factors contribute to the value of a business. Four critical aspects that often drive valuations include the market volatility of a geographic region or economic area, the types of assets a business has, the projected growth of a particular firm, and its size.
Valuating a business is a dynamic procedure, and various businesses have their own ways of assessing the value of their companies. A competent evaluator is extremely helpful if you are unsure which factors impact your business’ value.
BA FL|GA|HI can help you make sense of the many factors that impact your company’s value. Whether you are pondering a prospective business transaction, launching into succession planning, or encountering financial distress, our team effectively assimilates the information, makes the tough calls, and renders a robust valuation to help clients reach their objectives.