What is Business Value Based on?

Everybody wants to increase the value of their business, but it’s not always clear what business value is actually based on. While the amount of money that a company makes is, of course, the main driver, it’s far from the only factor that will have a bearing on its value.

The simple truth is that there are multiple elements that can affect the value of your company. To complicate matters further, these can change from sector to sector, and even business to business.

By having an understanding of the main factors that can make a difference though, you can work on the aspects of your business that make it more valuable, or even know what to look for in companies you’re considering acquiring.

Net profit

Let’s get the most obvious factor out of the way first. The amount of money that your company makes will understandably have a direct impact on the value of it. Most businesses are there to generate income, and most investors are interested in exactly the same.

Bear in mind though, that it’s your net profit rather than turnover or gross profit that really catches the attention, though. Your turnover could well be an impressive-sounding £1m, but if your operating costs total £975,000, then you’re only a few price hikes away from your entire business model losing its viability.

That’s not to say that investors wouldn’t necessarily be interested still. If you can generate large gross profits, then an investor may see scope for streamlining your operations to trim other costs.

Your industry

Sometimes, external factors can play the biggest part in how valuable your business is. Trends come and go, and if, for example, thatched roofs were to suddenly become the must-have for homeowners, any businesses that offer this service will experience a jump in their value.

Unfortunately, this can also work the other way too. While previously that same thatched roofing company may have been the only one of its kind in a 50-mile radius, it’s service’s new-found popularity could see multiple competitors suddenly pop up. With several new rivals on the scene, the company would have to offer a better or cheaper service than the others just to stay afloat.

Getting ahead of the competition can often pay off though. Businesses producing chargers for electrical vehicles ten years ago, for example, should now be in a strong position to head up the now-lucrative market.

Assets

Occasionally, businesses are sold that aren’t viable at all. They still retain some value, however, because of their assets.

As a business is its own distinct legal entity, it is the owner of its own assets, rather than the director. This means that a strong asset list can significantly impact a company’s value.

Company vehicles, expensive machinery and even your business premises can be especially attractive to potential buyers. Property, in particular, can skyrocket the value of a company. While almost any property will add some value to a business, those that are situated in sought-after areas will be of even more interest to investors. This could be a particularly good spot for a commercial premises, or merely a large amount of land that is ripe for a new housing development.

Intellectual property, trademarks, and patents

Selling lunchboxes featuring a popular kids’ TV character may generate some business, but being the only company in the UK allowed to do so, makes your company far more valuable.

Holding IP that protects your company from competitors makes your business more stable, and a safer bet for investors. A fear for many business owners is that a large corporation could suddenly spot the potential in your popular product and start to produce and distribute them themselves for a fraction of the price.

With manufacturing costs so low overseas, it need not even be a larger corporation that takes business away from you. A company importing Chinese-made products, for example, will likely be able to source them far cheaper than someone manufacturing in the UK.

Obtaining IP can be a good idea to protect your business against future competitor threats, and if you’re thinking of selling your company, it can significantly improve its value.

Staff

The staff your company has on board can either be a bonus or hindrance to its value.

Some industries require skilled workers that are hard to come by. The time and costs involved in sourcing and recruiting such workers can be substantial. This is why companies that have staff members such as these already in place can be highly attractive to investors.

On the flipside, a bloated staff roster can put off interested buyers instead. If potential investors think that your business has too many staff, they may see the trimming of numbers as a bit of a potential headache. Workers have many complex legal rights and can’t simply be let go of just because someone decides they’re not needed.

TUPE issues can hang around a company for months and cost them dearly. If an investor sees the need for staff cutbacks, it could put them off an acquisition entirely.

Contracts

Lucrative contracts are fought over every day, so those that already have them in place can find their value increased straightaway.

Of course, contracts can just as quickly be lost, so the impact they have on a company’s value may not always be as big as first thought. Given that great effort and amounts of money are often spent in the pursuit of large contracts though, those already won will usually make a significant difference to a company’s value.

Businesses should be careful that they’re not overexposed to risk by concentrating on one contract. Investors like to see a spread of clients to demonstrate business resilience should any be lost.

Reputation

If a business has already built a strong brand or reputation, an investor may be interested more in the name of the company than anything else.

This doesn’t necessarily just apply to large corporations (Wilko is a recent example of a valuable brand that was bought by The Range – Its actual shops were purchased by Poundland instead). Small businesses that have built a strong reputation within a town can still be sought after.

Marketing can cost a significant amount to do well, so a ready-made reputation can be a real selling point.

Build your company’s value

Talking to one of Forbes Burton’s small business growth specialists will provide you with bespoke solutions that can supercharge your company, no matter how niche its industry. Our experts have helped countless businesses to reach the next level by helping to implement innovative changes that drive growth.

What’s more, we can also help those looking to sell their business to put their company in front of thousands of interested parties. We have an extensive network of investors actively looking for opportunities to buy SMEs in any sector.

We provide free consultations that allow business owners to sample our service without commitment. Call us on 0800 975 0380, or email [email protected] to find out how we can help your business achieve tangible success.