What Affects Your Business’ Valuation?
Business valuation remains a contentious issue and something that cannot be neglected by any company, whether big or small. The right figure can be the difference between a company sealing the deal or going back empty-handed. While there are numerous ways of calculating your company’s worth, it is also necessary to study factors that influence valuations.
This article aims to examine the key aspects that can boost or reduce the valuation of a company.
Past Financial Record
Business valuation is greatly influenced by the financial track record of a startup. A business that can show steady and consistent growth in terms of revenue or profits will be valued favourably. On the other hand, a startup that shows slow, negative or irregular growth will be viewed critically. The costs are also taken into account – whether or not they have been handled well while the company scaled its operations.
Another aspect that entrepreneurs should keep in mind is maintaining proper records for the business. If you can present clean books duly mentioning all your financials, audits, customer records, etc., you not only reduce chances of error but also provide proof of your professionalism.
Size of the Company
It has been adequately proven that the size of a company affects its valuation. The bigger the company is, the higher it will be valued. There is a multitude of reasons for this, such as:
- Smaller companies are usually dependent on a few people. In case they cease to be a part of the company, the future of the business is put at stake. Bigger businesses are not highly dependent on such key individuals, which means there is less risk. However, if startups can reduce dependence on the owner or a key individual, they can improve their valuation.
- Big companies enjoy a higher share of the market and are in a better position to negotiate. This ensures that they will be able to get better deals and can produce at lower costs. They will also be able to attract more consumers because of their market power.
- Smaller companies may find it difficult to raise credit from banks as compared to more established firms.
Customer Base
The size and diversification of a company’s customer base are essential while determining its business valuation. If a startup is dependent on a few clients only, the valuation will be highly conservative because the company loses its revenue if they do not buy any further. However, if a startup has a broad and diverse base of customers, the risk involved is less, improving the chances of a substantial valuation.
Another factor that needs to be taken into consideration is the percentage of revenue that is derived from the top few customers, even if the client base is extensive. In case a high percentage of sales come from the few main buyers, the valuation is low. But if the spread is not very uneven, the valuation is higher.
Market Opportunity and Growth Potential
A business will be highly valued only if it is operating in an industry that is predicted to grow steadily in the future. Simultaneously, the company must also be able to demonstrate its own ability to scale operations and take advantage of the expanding market. The company should have a plan for the future, which can be adjusted as and when required. However, it is vital to ensure that the targets being set are realistic and feasible.
The past sets the tone for the future. If there is a strong record of profitability, good margins, and achieving milestones, the projections will be attractive, and investors will trust you to achieve them. This will boost your valuation.
Competitive Edge
In today’s world, no industry lacks intense competition. Startups especially bear the brunt in this case. Every company should ideally have a solid plan which can help them edge out other competitors in the field. A differentiating sales plan, marketing plan or a USP may be enough to put you ahead of the rest.
A startup is likely to be valued higher if it is seemingly better than its direct and indirect competitors. Any company that does not have something that can set it apart will fail to attract a reasonable valuation.
Founder and Team
Another aspect that has an impact on the valuation is the team running the company. The entrepreneur or founder must be determined and passionate about running his business and helping it achieve greater heights. His team must be composed of skilled individuals who understand their responsibilities.
A strong management team reinforces the belief that the startup will be able to achieve its targets. Having too many or too few employees can hamper the efficiency of a startup. Investors will put their faith in a team they know is competent and professional.
Reputation and Intangibles
The reputation that a company builds for itself from the very beginning is imperative to its success. Therefore, it plays a crucial role while determining its valuation. Although it is hard to put a figure on the goodwill of a company, it does demonstrate its ability to create a place for itself in the lives of the consumer.
A company that boasts of a good reputation will fetch a higher valuation than a company that has a negative one.
