Factors Affecting Business Value
Do you know what your company is worth? In many situations, this is the big question which can only be answered once you put your business up for sale. However, there are some concrete factors that determine business valuation. Below we will take a brief look as some of these features that can add or detract from your business valuation.
Business Growth
Buyers are looking for growth. A business that can demonstrate systematic quality revenue and earnings growth will receive a favorable business valuation. This holds particular true if future growth prospects can be substantiated and clearly articulated to the buyer.
Customer Base
Businesses with a diverse customer base will receive a higher valuation than businesses with a high reliance on a few key customers. Diversify your customer base if your top 10 customers represent more than 50% of your annual revenue.
Audited Financial Statements
Uncertainty will cause the buyer to increase their risk premium and hence reduce the valuation for your venture. Spend the time and money to have your financial statements audited by a 3rd party CPA firm. The cost of the audit is cheap compared to the loss value cost caused by not having audited statements available.
Management Team
The quality of the management team matters. This holds especially true when the buyer is a silent owner such as a Private Equity or Venture Capitalist firm. Make sure to invest in a professional management team that can run the business before you put it up for sale.
Litigation and Disputes
Settle all your legal and/or customer disputes before your market your company. A slew of litigation of customer/vendor disputes will not only be detected by the buyer in their due diligence, but will most likely cause the buyer to walk or price your business at a significant discount to market multiples.
Minimize Discretionary Spending
Keep personal expenses off your company's books. Buyers are skeptical of substantial discretionary add-backs and will price your business accordingly. Yes it makes sense for tax purposes, but do not expect to get a favorable valuation if you use your business as your personal piggy bank.
Deal Structure
Understand the tax implications caused by the deal structure (asset vs. equity sales, earn-outs, sinking basket provisions, caps etc). Also have a good understanding of tax liabilities arising from your business incorporation status and hold back provisions. It is not what you sell your business for that counts, it is what you keep.
If you have any questions on the above material or want to know how KDS Capital can help you in your venture, feel free to call us at 602-490-0723 or toll free 800-880-0717.