Updated: May 21, 2022
Depending on which side of a business purchase you occupy (buyer or seller), you probably have preferences on the valuation method used to determine how much the target business interest is worth. The result is usually a combination of two or more types of valuation methods, but some factors will generally be present in whichever method you choose. Below, we’ve outlined five important elements.
- The team. Some mergers and acquisitions are executed with the sole purpose of gaining brilliant and innovative employees. Even if that’s not the case with you and your company, the team you’ve assembled can have a noticeable impact on what someone is willing to pay you for your enterprise. If your team is rudderless without you because your company doesn’t have repeatable and well-documented processes, your valuation could suffer.
- Cash flow/EBITDA. Want to showcase a stripped-down version of your company’s financial performance? Highlight your EBITDA, or earnings before interest, taxes, depreciation, and amortization. A business that has seen its yearly EBITDA increase could signal to buyers that it will continue to grow and increase its profitability. In many cases, cash flow can be more useful than net profit, as certain assets need continual reinvestment for continual utility.
- Client concentration. How does your business actually make its money? Does revenue come from recurring income streams, or does the company rely on one-off transactions? Recurring revenue is typically more attractive to prospective buyers, but that attractiveness can be dampened if your client base is made up of just a handful of key accounts. The impact just one client would have if he or she were to pull out should be considered by potential buyers. A diversified client base with many recurring income streams represents the optimal circumstances for acquiring companies.
- The company’s overall brand. Are there any intangible assets more important than this one? While there’s no clear-cut way to quantify your company’s brand equity, it will heavily affect the purchase price. Your company’s intellectual property strategy contributes a great deal to the value of your brand.
- The company’s current stage. Startup founders always have an uphill battle when convincing investors or buyers to take a chance on their companies. Without a track record of success, outsiders are understandably hesitant to inject capital into something unproven. A company that has stood the test of time, conversely, naturally demands a greater asking price.
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There are many situations that call for a comprehensive and full-scope valuation of a company. Ownership changes (buying out a partner’s share or outright selling the company) are common situations that warrant valuations. If you’re going through a complex transaction with your business, Monahan Law Firm is here to help you reach your objectives and efficiently come to a resolution with the other parties involved. Get in touch with our team here to discuss your options. The following two tabs change content below.