Contact Us

How Non-Financial Issues Impact the Value of a Company

MC900127674
For both sellers and buyers of private companies one of the biggest challenges is arriving at a realistic valuation. A valuation that reflects not just past profitability, but the underlying commercial and organisational strengths of the business. The things that impact its ability to make profits into the future.

Putting a value on a private company is not “just about the numbers”. Most book and press articles about company valuation focus on complicated ways to use profit figures to calculate a selling price. As a longstanding UK business broker we know that in the real world a host of qualitative issues play a big part in the price offered for your business. After all buyers are not paying for past profits, these have been taken by the sellers, but for the company’s capacity to make them money in the future.
 
What Are The Main Non-Financial Issues Buyers Take Into Account?
 
Strength of Management

Is there a management team in place that can run the business without the owner? If not the buyer will put in a cost for adding staff and reduce the offer.

Quality of Customer Base:

Does one customer make up a large proportion of sales? If yes, the buyer will see this as big risk and reduce the offer price. Buyers will be reluctant to pay full value for goodwill if any customer is more than 30% of turnover. They may also want to link the timing of consideration payment to retention of the customer – often for up to two years.

Have customers been with the business for several years and do they order regularly? If the answer is no the offer price will be reduced.

Supplier Power

Is the company dependent on a major supplier? For example are you an agent or distributor for one main supplier?Any perception of risk will reduce the offer.

Turnover & Profit History

Are there large swings in sales and profits from year to year? If yes the offer will be based on the worst years.

Growth Potential

If sales and profits have grown strongly is there good reason to think this will continue? If growth is based on a new market or technology then a premium price will be achieved. If not it will be harder to get paid for growth prospects.

Fixed Assets:

If plant and machinery is on its last legs, or your IT runs on Windows 98, buyers will take this into account. At a minimum the cost of replacement or repair will be knocked off the offer price.

Location

A remote or difficult to reach location will reduce the offer price.

Market Changes

Markets going through regulatory or rapid technical change increase uncertainty for the buyer. Unless you are leading the change the offer price will be lower.

 
By How Much Do Problems Reduce A Company’s Value?
 

Putting a figure on the reduction in a company’s value caused by a problem in any one of these areas is inherently subjective. For a small company a significant weakness in any area can make the business effectively unsalable. My own rule of thumb is that a manageable problem will reduce a company’s value by 25%. Two problem areas, or a serious weakness, might reduce value by 50%.

The amount of reduction will be influenced by the specific details of each company and the number of interested buyers. Whether you are a buyer or a seller it always makes sense to get advice of a suitably experienced professional before completing a transaction.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
We welcome comments on posts, and questions from our readers. Use the “Leave a Reply” box below. We answer all reader questions within 24hrs. If you would like to be informed about new posts on the theme of selling a private company click the “Subscribe” button at the right hand side of this page.

One comment on “How Non-Financial Issues Impact the Value of a Company

  1. Pingback: Realistic Valuations of Private Companies | Select Business Sales

Leave a Reply

Your email address will not be published. Required fields are marked *

*

* Copy This Password *

* Type Or Paste Password Here *

22,366 Spam Comments Blocked so far by Spam Free Wordpress

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

back up ↑
UA-35460329-1