What affects the valuation of a business?
To determine the market value of a business means analysing a wide range of factors. The likes of financial performance, market trends and overall economic conditions can all play a major role. Business valuers in Darwin employ comprehensive analysis and valuation methodologies to deliver accurate valuation reports for businesses across all industries.
When it comes to financial performance, the following factors contribute significantly:
- revenue growth
- profitability
- cash flow
- debt levels.
Naturally, companies with strong financial performance will command a higher valuation. The same goes for ideal economic conditions or favourable market trends, which can boost an organisation’s market value.
The same can be said for the general state of the market, as well as trends within the specific industry. For instance, high or low demand and an influx or lack of competition will notably affect the result of the valuation.
The likes of a business's ownership structure, management team, customer base and intellectual property are vitally important too.
External factors must be considered as well.
These could include:
- legal and regulatory concerns
- political instability
- changes in technology.
Business owners, investors and stakeholders have a wealth of factors they need to consider when planning for the future and making strategic investment decisions. This is why the valuation process is so crucial.
What makes a valuation higher?
When conducting a valuation, valuers’ methods involve looking for a combination of factors that reflect the strength and potential of the enterprise. As previously stated, these tend to centre around a company’s financial performance, market trends, growth prospects and management expertise.
The law of supply and demand is essential here.
If a business offers a product or service with high demand, its valuation will typically be higher. This goes for companies with a strong competitive advantage as well. That could be a proprietary technology or intellectual property and will lead to a higher market value for the business.
The above conditions, when applied to a business in a growing market, have an even more significant effect.
A valuer will also assess the organisation’s potential for future growth.
This could be by:
- entering new markets
- developing innovative new products and services
- expanding its customer base.
The higher a company’s potential for growth, the higher its potential market value.
An adept management team is another asset that will boost a company’s value in certain cases. For example, if a management team is well-experienced and possesses a track record of successfully growing the business, this will contribute to a favourable valuation.
What hurts a business valuation?
In any form of business valuation, valuers will need to pay close attention to all factors that can potentially decrease the value of a business. This can provide vital information to entrepreneurs, investors and companies looking to buy, sell, manage or maintain a business in Australia.
Once again, financial performance is a key indicator here.
Valuers will thoroughly review a company’s financial history to identify:
- low revenue growth
- declining profitability
- unstable cash flow
- mounting debt levels.
Another aspect that valuers look at is a company’s customer base. Lacking a strong customer base will surely affect a valuation negatively. This is because such a business may struggle to consistently generate revenues and attract potential buyers.
Negative changes to market trends or industry conditions are impactful as well. New competitors, shifts in consumer preferences and economic downturns can all hurt a business's worth. Legal and regulatory concerns can have a similar effect. These include the likes of lawsuits and compliance issues.
Finally, various internal factors can have an effect on the valuation. Whether that be poor management and governance structures, inadequate intellectual property protection or ineffective marketing strategies.
The complexities of these issues highlight the need to work with a qualified, independent valuer. Their experience across multiple industries is vital in ensuring quality and reliability.
How does the type of business affect the valuation?
Among a valuer’s chief concerns when reviewing a company is the type of business it is or the industry that it operates within. The unique aspects of various types of organisations will inform the valuer’s approach and influence their findings.
Different industries all have unique characteristics and trends that impact their growth and profitability and therefore their valuation.
An example would be the difference between service and product-based businesses.
Service-based companies, such as consulting firms, tend to have low capital requirements, high profit margins and low fixed costs. These factors lend themselves to a higher valuation. On the other hand, product-based businesses tend to be high-cost. They require significant investments in inventory, machinery and other fixed assets. This can reduce a valuation.
Companies that rely on foot traffic and their location to drive business may also be valued very differently from companies that depend on website traffic and digital marketing.
The ownership structure is important to consider too. Publicly traded companies, subject to more stringent regulations and transparency requirements, may be valued very differently from privately owned organisations.
Summary
To form a comprehensive and accurate business valuation, licensed valuers need to consider a wide range of internal and external factors. These include an organisation’s management and ownership structure, financial performance and growth potential, as well as market trends and the industry that they fall within.
Valuers look for high or low profitability, the strength of a customer base, business strategy and more as indications of an enterprise’s true market value.
To uncover more about the business valuation process, or to receive a free quote on any of our valuation services, reach out to one of our highly qualified valuers today.