Factors Affecting the Valuation of a Company
Your company’s valuation is not just some number or amount randomly assigned to it. The valuation actually relies on many factors to present a complete picture of your company’s current state as well as the possibilities of profitability moving into the future.
Some key factors to keep your eye on would be:
1. Market & Industry Growth and Potential
After a survey of the industry your business is a contributor to, it must be apparent that there is significant demand for your products and services. Market trends can also help determine if your profitability will increase over time. The valuation of other similar companies may also aid in measuring the potential of your own business in comparison.
2. Existing assets
Of course, physical assets like properties, contracts, equipment and the like are the most common basis for valuation. However, aside from those main factors present in the balance sheets, intellectual property and competitive advantages the company has must be taken into account. Does the company hold any patents? Exclusive contracts with third parties? And other questions, must be answered.
On the other hand, debt and liabilities must also be surveyed and properly documented as part of the valuation – more often than not, against your total assets.
The quality of stakeholders of the business must also be investigated. Not all investors are equal, especially if the company ascribes to equity financing. The percentage controlled by investors, and their involvement in business decisions must be evaluated.
4. Reputation as a Company
Your company’s standing with its customers and community play a role as well – albeit more when it comes to attracting investors or selling the business. What people say and their past experiences dealing with you (as suppliers, investors, customers, etc.) can be the most convincing factor. Especially for start-ups and sole proprietorships which, majority of the time, largely depend on hearsay and word-of-mouth in the beginning stages of growth.
5. Internal Growth and Potential
Aside from having an excellent roster of people working with and for the company, there must be evident potential for development within the staff. More than management potential, training as well as a reputation for low attrition can be pluses. Success stories and business cases can be used to demonstrate that your company is a preferred employer. This usually is proof that the company is doing well too, and has plans to expand and grow over time.
6. Perceived Management Capability
Your involvement as a management team, and the success of such, can also be looked at to gauge the potential future trends for the company. Looking at the reputation of the management team and the goals they have set as well.
On top of the six factors listed above, ensuring that all proper paperwork is filed will make it much easier to execute a company valuation. You may also want to look into hiring a third party firm or individual to objectively assess your company for you. Whichever route you choose, ensure that all bases are covered and the company valuation you arrive at presents the full and accurate picture of your business.