Business valuation is more than just knowing how much a company is worth. Looking at the factors that affect business valuation can give you insight into how the company is running and what needs to be improved. Let’s look at the things that increase the value of your company … and can even multiply its valuation by a factor of twenty or more. Let’s do this from the point of view of another company that might be looking to buy yours...
Client Base: If you’ve got customers, your company’s valuation might be roughly equal to its’ turnover. In fact, when one company buys another, it’s often to get access to the customer base.
Skills: If you’ve trained your staff well, you might get a valuation of about two times your turnover. Why? Skills can take years - and lots of money - to acquire. If your company has them “off the shelf” you have a valuable asset.
Systems and Processes: Good systems and processes might get your company a valuation of perhaps three or four times your turnover. It's less obvious, perhaps, but immensely valuable. Systems streamline a business and make it more profitable. As an example, just imagine how much MacDonald’s’ systems would be worth to Burger King!
Product: A good product line will get you a valuation of seven or eight times your turnover. If you have a broad range of strategically different products, so much the better. Think of Tesco - now selling insurance as well as groceries.
Distribution: This is your route to market. To put it more clearly, it’s the way your customers gain access to your products. An excellent distribution channel will get you a valuation of 10 to 12 times your turnover.
Position or Brand Position: A good brand takes years to build. The way you position yourself in the market creates your brand image. And a brand has value because customers attach value to it. A brand will get a valuation of 14-16 times your turnover.
Scalability: If your business model can easily be scaled up, then so can your bottom line. That adds the most value to your company – and it can get you 20 times your turnover in valuation.
We’ve listed these factors in ascending order of their contribution to a company’s perceived value. The order might surprise you - but it is this model that explains how small companies with little more than a website are able to sell for millions. Consider these factors: customers - is your client base loyal? Is the customer database up to date? How streamlined are your systems? Are your processes well-understood and efficient? What is your product? Could it be enhanced? How long is your distribution channel? Is your brand positioning clearly understood? Is it influential? How good is your industry reputation? Scalability: how will your business change as it grows?
Working on these factors could add significant value to your business.
If you need some help with finding the value, and increasing the value of your business I have helped a number of business owners do exactly that. We're here for further help if you need it.
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