Company and External Factors Influencing Business Valuation

By Bill Quish, Mergers and Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)

As a mergers and acquisitions intermediary, one of the most contentious discussion topics I encounter when meeting with a prospective business seller relates to business valuation. Most potential sellers have a preconceived notion of what their businesses are worth rather than knowledge based on specific value drivers to support a realistic assessment of value.

The following list represents some of the business and economic factors that can have a significant impact on business valuation. Strategic and private equity buyers will assess these and other factors to determine the upside of an opportunity and to determine the degree of risk they perceive to be associated with a potential acquisition target. It is precisely these factors that a buyer uses to determine what valuation multiple to apply to their assessment of your business' normal earnings or cash flow generating ability in order to make an offer.

Company-Controlled Factors Influencing a Business' Valuation

Value Drivers	Value Diminishers
Larger revenue size	Smaller revenue size
Strong revenue growth rate	Declining, flat or low revenue growth
Higher, consistent gross margins^¹	Low, inconsistent gross margins^¹
High preponderance of negotiated sales opportunities	High preponderance of bid sales opportunities
Higher industry operating margins^¹	Low industry operating margins^¹
Strong, diverse management team	Company primarily dependent on the owner
Consistent history of profitability	Inconsistent profit history
Strong, sustainable, predictable cash flow	Weak, unpredictable cash flow
Repeat customers	One-time customers
Strong, profitable order backlog	Low, declining-profitability order backlog
Niche products or services	Commodity products or services
Strong barriers to market entry	Low barriers to market entry
Proprietary products or technology	No proprietary products or technology
Low foreign competition exposure	Significant foreign competition exposure
Large market potential	Limited market potential
Several exit option possibilities and buyers	Limited exit option possibilities and buyers
Sufficient working capital to support growth	Inadequate working capital to support growth
Low annual capital expenditure requirements	High annual capital expenditure requirements
Low exposure to technological change	Significant exposure to technological change
Multiple, strong sales distribution channels	Single, weak sales distribution channel
Low customer revenue concentration	High customer revenue concentration
Undervalued assets	Overvalued assets
Multiple revenue sources (pillars)	Single revenue source (pillar)
Strong industry market share	Low industry market share
Strong, recognizable brand identity	Minimal brand identity
Well-maintained equipment	Significant deferred equipment maintenance
Modern, highly productive equipment	Outdated equipment
Low debt-to-equity ratio	Moderate to high debt-to-equity ratio
Not a highly regulated industry	Highly regulated industry
Above-average industry performer	Below-average to average industry performer
Audited financial statements	Compiled financial statements
Nonunion workforce	Unionized workforce
Fully funded liabilities	Unfunded liabilities
Written and assignable customer agreements	Unwritten or not assignable customer agreements
Written contingency plan in place	No contingency plan
Key employee agreements, noncompetes	No or weak agreements with key employees
Written business plan	No business plan
Recent legal due diligence review	No recent legal due diligence review
Clean balance sheet	Balance sheet cluttered with obsolete and personal assets
History of achieving financial projections	Inconsistently meets financial projections

(1) For companies in general and for the specific industry

External Factors Influencing a Business’ Valuation

Value Drivers	Value Diminishers
Merger and acquisition market is active	Merger and acquisition market is down or flat
Company is in a growing industry	Company is in a mature or declining industry
Economy is growing	Economy is recessionary, flat or hardly growing
Interest rates are low	Interest rates are high or rising rapidly
Strategic buyers have cash on hand	Strategic buyers are holding onto their cash
Private equity buyers are investing	Private equity buyers are not buying/investing
Transaction financing sources are lending at higher turns of EBITDA	Transaction financing sources are lending at much lower turns of EBITDA
Transaction taxation rates are low	Transaction taxation rates are higher

Some of the above value drivers are more important than others. Many of these can be analyzed and addressed as part of a comprehensive “exit planning” process.

If you have any questions or would like to confidentially discuss how these factors relate to your business’s valuation, please contact me for a free consultation.

Bill Quish is a Mergers and Acquisitions Advisor and Certified Exit Planning Advisor (CEPA). He is a Senior Managing Director at Lyons Solutions, LLC. He can be reached at 860-658-1845, bquish@lyonssolutions.com or bill@mergermaven.com.

Company and External Factors Influencing Business Valuation

Company-Controlled Factors Influencing a Business' Valuation

External Factors Influencing a Business’ Valuation

Bill Quish is a Mergers and Acquisitions Advisor and Certified Exit Planning Advisor (CEPA). He is a Senior Managing Director at Lyons Solutions, LLC. He can be reached at 860-658-1845, bquish@lyonssolutions.com or bill@mergermaven.com.

Articles