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Factors affecting the value of a company

ettevõtte väärtust mõjutavad tegurid
There are many different methods and formulas for determining the value of a company. Regardless of which one is used, in addition to the company's business model and financial indicators, several other factors must be taken into account that shape the company's price. In this article, we will look at some of the most important aspects that help to understand why a potential buyer offers a lower price as well as draw the current owner's attention to the real strengths and weaknesses of the company.

Customers

The value of the company can be significantly increased by the fact that the customers of this company have great potential for the buyer for various reasons.

It is quite common that the reason for accepting the price charged for the company to be sold has been a promising customer portfolio. The price may also be increased if the buyer wants to gain access to the customers of the business being sold in order to use them as 'door openers' for their own products or services.

However, the value of a company may be depressed by the fact that the total sales revenue of the company being sold is generated by only a few individual customers. Uncertainty is further compounded by the fact that one or a few key customers account for a very large proportion of the total customer portfolio. In both cases, there are high risks for the buyer, as the loss of one key customer reduces the sales revenue of the acquired company drastically.

Products and services

A strong portfolio of products or services can also significantly increase the value of a company.

For example, if a company's sales turnover is more evenly distributed between different products, the company's financial results are not so much affected by the decline in demand for a product. As a result, the risks are lower for the potential buyer and they can be more confident in the return on their investment when buying the company.

Certainly, a potential buyer of a company also monitors the life cycle of products and services. Ideally, a product portfolio is one in which different products are at different stages of their life cycle. However, if all products are at the end of their life, and there is a shortage of new products in the portfolio, this will reduce the company's future profit opportunities, which in turn will reduce the company's value.

Business sector

The business sector in which the company operates affects the value of the company primarily from a forward-looking perspective.

For example, companies in the IT sector often have higher growth prospects than, for example, textile companies. Success stories like many like Apple or Facebook are fueling the expectations of everyone in the technology business. Sometimes this approach is justified, but in many cases there is a tendency to overestimate the future value of the company.

In the case of boring and non-sexy (read: stable and not so innovative) areas, the situation is more balanced, where the sector does not lead to large deviations in the selling price. However, an area that is clearly disappearing or unpopular in a particular market may have a negative effect on the company's sales price. In this case, the company's business model should be reviewed first, rather than trying to sell the company as such in a declining market.

Employees

Töötajad on kindlasti ettevõtte kõige ebakindlam ressurss. Ta jääb haigeks, eksib, ei ole efektiivne ega ratsionaalne. Samas on ka selge, et ilma nendeta ei saa.

The risk of employees to a potential buyer can manifest itself in several ways. This is certainly amplified by the situation where the company being sold is understaffed or composed of people with insufficient skills or knowledge. In many cases, staff shortages are certainly a factor holding back a company's growth, which in turn can mean a loss of potential buyers for the company's seller.

The role of the company's key employees also deserves special attention. The more the business model makes them dependent on them, or the more knowledge and skills are concentrated in a small number of employees, for example due to a lack of processes, the higher the risk. If a company wins most customers through the contacts of just one salesperson, buying such a business becomes too risky and a specific salesperson may be bought over.

Whether or not the company is to be sold, the risks to employees should definitely be mitigated. If it is difficult to change the demographic situation, which sets limits on finding workers, the risks associated with key workers can be mitigated. It is also worth thinking about developing the company's processes and documenting business-critical knowledge.

Owner involvement

A company that, for various reasons, survives only because of the identity of a particular owner, is risky.

For example, if the business relationships of the company are established solely through the owners or all the know-how is in their heads, it significantly reduces the liquidity of the business. Therefore, the number of people wishing to buy this business can be very small.

Owner's dependence is more common, but not always, in smaller companies. Thus, when considering the sale of a company or not, the owner should play with the question of whether the company can be successful without its direct contribution. This kind of thinking exercise often helps to create ideas for improving the company's processes, mitigating risks and increasing the value of the company.

Of course, there are even more factors that affect the company's sales price. To avoid unpleasant surprises when selling or buying a business, it is wise to think through all the possible scenarios in advance.

The more thorough the preliminary work, the more worry-free the company's buying or selling process and the fairer the company's price.

Mati Maasik
Mati Maasik
mati.maasik@incorply.ee


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