9 Factors that Affect the Value of Your Business

Blood, toils, tears and sweat go into building our businesse; however their values are very rarely a direct product of our efforts.  A recent bidding war between HP and Dell pushed the stock price of 3Par from $10.00 to $33.00 over a two week period.  The company ultimately sold for $2Billion.  It seemed that both HP and Dell decided that they needed a company that sold storage servers and were ready to pay far more than an independent valuation would have gotten 3 Par (the market had valued it at $700 million).  Of course most businesses are not 3Par, and most business owners need to take numerous factors into account when determining the value of their business.  Some of these are discussed below:

1. Age:

The age of your business will have a direct impact on it's value.  If it is older and more well established, it is perceived as having a better chance of sticking around and consequently, a higher value.

2. Growth Rate:

Businesses with product and service offerings that are relatively new tend to have a value than those with more mature products.  For example,  Netflix and Facebook attract higher multiples than more mature organizations like Microsoft or McDonalds.

3. Uniqueness of product or service: 

A business that is able to to differentiate it's products and services has less chance of being priced out of the market.  Despite selling products and services that are widely available, Apple is the master of differentiating it's offerings.

4. Barriers to Entry:

Barriers to entry will contribute to an increase in a company's value. An exorbitant capital investment is required to start manufacturing airplanes, compared with web design services which can be done with as little as a computer and a mom's basement.

5. Concentration of Customers:

A business that has a small number of large customers will be less valuable than one with a large number of small customers.  It is not uncommon for businesses, that depend heavily one one or two customers, to go bankrupt after losing one of them.

6. Owner Managed:

An owner who is actively involved in the business will find it more difficult to sell his or her business, than one that has a staff that can be easily transitioned. 

7. Location X 3:

A tourist shop in Times Square will most likely be worth far more than one in Poughkeepsie.  Additional considerations include the size of the premises, potential for expansion and lease restrictions.

8. Industry Strength:

Social media is booming right now.  Newspapers are not. Choose wisely.

9. Environmental Risk:

Potential for environmental liabilities will reduce the value of a business.  Oil companies have to set up significant reserves for potential environmental risks, that directly affect their bottom line.

As demonstrated with 3Par, business valuations can be a fairly subjective exercise.  Ultimately, the value of a business is what an independent third party will pay for it.  It is, however, important to consider the factors that affect the value of your business, as the more thorough the valuation, the more likely you are to get your asking price.