Key Factors That Affect Business Value

Most business owners never think about the value of their business until they are ready to sell and retire. At this stage it is often too late to enhance the value of the company . The following key factors affect the sale value of most businesses.

1. Historical Financial Performance

Business buyers want to know how a company has performed for the past 3-5 years. Have the company revenues been trending upward and does it show profits with good cash flow.  A Business with declining revenues , little or no profits and poor cash flow raises caution signs to any potential buyer.

2. Future Growth Potential

What are the key factors that  affect growth in your industry and what strategies has the company  utilized to grow the company and profitability in its current market? Does the company have a good reputation in the industry?  A company with poor future growth prospects and a poor industry reputation will be difficult to sell.

3. Customer Base

The makeup of your customer base and diversification within that base is critical as it is risk factor for any potential buyer to consider.

For example, a company with one  customer that makes up 50% of its revenues poses significant risk for any buyer as the loss of this customer  would be devastating  to profits and cash flow.  A customer base that is well diversified and large in number would lower buyer risk and enhance business value.

4. Key Man Reliance

Another important factor to consider that can affect business value is how dependent the company is on the owner or a key employee.

A business that is dependent on the owner or a key employee will be worth less to a potential buyer as there is a risk that customers may not stay with the business long term should the key employee leave or the owner is no longer operating the business.

The four factors listed above are key areas of a business that can affect  ultimate business value.  It is recommend that business owners have a professional business valuation done 3-5 years before considering selling in order to begin implementing procedures  to enhance future business value.