Whether you plan on taking your company public or want to sell it to another owner or business, you need to know how much your business is worth. Several factors can affect your company’s valuation. Some factors can be within your business’s control while others are largely dependent on market conditions around you. Take a look at what can influence the value of your business.
Your Company’s History
Your business financial history plays a considerable role in determining its current valuation. Ideally, the revenue your company brings in will have been on an upward trajectory, not a downward one, for the past few years. Your company’s expenses should also be relatively stable or, even better, trending downward. A company that has seen a decrease in revenue over the years or that is spending more and more as time goes on is likely to be valued lower than one with increasing revenues.
What’s going on in the world around you can have an impact on your business valuation, as well. For example, overall market uncertainty and volatility can cause investors to value your business for less than you would otherwise expect. Lower than average interest rates might also affect your company’s market value. When rates are low, lenders will get less of a return when they issue loans. That can cause them to seek out alternative forms of investing, such as purchasing shares in privately-held companies.
The rise of cryptocurrency and other forms of currency can also impact your business’ valuation, especially if your company reports certain forms of currency on its balance sheet. Some cryptocurrencies can be relatively volatile, which might make it more challenging to effectively determine the value of a company.
Finally, a trend that shifts investors away from a globalized market to a more local economy can also affect your company’s valuation. A shift away from globalization can make it difficult for your company to source the supplies and materials it needs, which can affect how much your company is perceived to be worth.
Your Customer Base
The size of your company’s customer base, its diversity and its potential can also affect your company’s valuation. For example, if your business relies on orders from just one or two major customers, it’s likely to be valued for less than a company that has a broader and more diverse customer base. The more customers you have, the more spread out the risk is. If one or two customers stop working with your business, you can more easily pick up the slack. But if you only have a handful of clients and one of them cancels their contract with your business, your revenue is likely to take a bigger hit.
There are some expectations to the rule, though. For example, if your company relies on a few customers but has long-term agreements with those customers, you’re likely to look less risky compared to a business with few customers and no longer-term agreements.
Another factor that can make or break your business valuation is the company’s dependence on the owner. If you were to walk away from the business in the near future, what would become of it? A business that is heavily dependent on the contributions of its owner or founder is one that is likely to have a lower valuation than one that is more independent of its owner.
Having little dependence on the current owner can also make your company look more appealing to buyers. A larger business that wants to acquire a smaller one might not be interested in bringing along the founder or owner after the sale.
Your Company’s Prospects
What is your business’s potential future? If your company’s prospects look bright, it’s going to be worth more than a company that is nearing the end of its useful life. For example, if your company has demonstrated an ability to pivot and adjust to an uncertain world, it can be more appealing to investors and potential buyers than one that seems stuck in the past.
Another thing to consider is the market saturation and your company’s place within it. Is the market crowded, meaning are there lots of competitors? If so, what is your business doing to stand out from the crowd?
Having a realistic idea of your company’s market value can help you decide what steps to take next. The virtual CFOs at New Direction Capital can work with you to help you assess value, make a plan to increase your business’s value and achieve profitable growth. Contact us today to hire your virtual CFO.