11 Aug Business Valuation…….It’s not just the figures!
Yes, financial information is important. But often non-financial information is more important in determining the value of a business. Many of the real value drivers do not appear on the Financial Statement, so it is critically important to fully understand the company’s operation.
How reliant is the business upon the owner’s skills, experience, and relationships? Are these transferable or does the goodwill walk out the door with the owner? And are there key staff who it would be difficult to replace, or whose loss would damage sales and profits?
Products and Services
How vulnerable are these to economic changes or legislative changes? Are they exclusive or is there strong competition out there? Are there any supply contacts or customer contracts in place to ensure profitability going forward?
Premises and Facilities
Is there a sound lease in place if the business premises are leased? If so, is the rent reasonable and when is it due for review? Are the premises adequate if you are contemplating growth? If they are not a long lease may be a disadvantage. Apart from the rent what other obligations does the tenant have – rates, insurances, repairs, refurbishment?
What marketing strategies do they employ? Internet, print ads, direct mail, database marketing, and PR activities – and where is the scope for improvement? Is the business clear on its target market and getting its best “bang for the bucks”.
Plant and Equipment
Is it in good repair or likely to require replacing, upgrading, or repair in the near future? Is technology impacting machinery requirements for the industry? For some industries repairs and maintenance can be a major cost and an unwelcome surprise if it has been deferred.
On average these comprise 72% of the value of businesses we sell. They are non-physical items (some we mentioned above) that are important to the generation of income and provide a core competitive advantage. Some can be transferred legally (e.g. patents, trademarks, franchises, leases, supply contracts etc.) but some may not. Customer databases, a trained workforce, and long-term relationships may be key profit drivers but not easily passed on.
We believe curiosity is more important than calculating ability when assessing or appraising a business.
Full information and a full understanding of the operation is essential to arrive at a credible opinion of value and viability. Financial accounts are only part of the answer.