Six factors in determining business value

Mighty trees grow from little acorns

2020 has been a highly disruptive year for most businesses due to the coronavirus pandemic. Naturally, profitability may have taken a short-term hit, but well structured and operationally run business are likely to retain their long-term value.

It is important to know the value of any business, to help with either selling the business or more commonly to help raise operational finance and long-term investment into the business.

In this blog, we look at a few high-level factors in determining business value.

Management

The biggest value generator of any business is the executive management. How well they run the business will be a large determinant of the overall business value. An effective management board will ensure business to operates effectively even when faced with economic difficulties. For example, how agile is the management to look for ways of streamlining, automating or delegating work to ensure continued profitability. The skills and experience of staff is also a major part of business value. A loyal team of people who work well together may mean a higher value.

Structure

How complex the operating business structure is will either help or hinder business value. A wide-ranging complex business structure may naturally attract pockets of inefficiencies to be lost within a mammoth business organisation. This could lead to long-term drain on profitability. These may be hard to identify and streamline due to layers of hierarchy or bureaucracy which have entrenched over a long period of time. Ensure an agile and appropriate structure compliant with local geographical regulations to add great value to a business.

Culture

Organisational culture can have a huge impact on business value its reputation and brand value. A proactive culture of transparency and straight-forward business operations, when staff are encouraged to innovate and bring new ideas, this can help an organisation remain fresh and modern and importantly receptive to the changing market trends. When organisations are perceived to have a positive impression for product quality and service, the business is likely to retain customers’ trust and brand value. This is turn will ensure profitability and strengthen business value.

Product or service

The products and services an organisation has to offer is one of the biggest asset and value driver. A high-quality product or service can mean a higher-value business if sold to the target customers effectively. Any trademarks, copyrights or patents a business owns naturally adds to the overall business value.

Market type

Businesses which operate in sunset sectors may well have a ceiling or declining business value. For example, a business making PCs only have limited long-term potential given the market trend towards laptops and tablets. Thus, unless the business innovates and expands in product range, it may very well have declining business value, regardless of how well operationally the business is set-up or historical high profitability.

Financial record

Detailed, accurate records that show a sustained history of strong financial performance will support high business valuation. Of course, as the past performance is no reflection of future performance, financial records only help provide creditability to the base level value of a business. To this, softer factors like management, corporate reputation will help derive the goodwill of a business. The totality of base value plus goodwill will determine the overall business value, normally expressed as a factor of profit-to-earnings ratio.

Ultimately, business value comes down to what the market perceives of a business, either on a public exchange or via a private placement.