Company and External Factors Influencing Business Valuation

By Bill Quish, Mergers and Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)

As a mergers and acquisitions intermediary, one of the most contentious discussion topics I encounter when meeting with a prospective business seller relates to business valuation. Most potential sellers have a preconceived notion of what their businesses are worth rather than knowledge based on specific value drivers to support a realistic assessment of value.

The following list represents some of the business and economic factors that can have a significant impact on business valuation. Strategic and private equity buyers will assess these and other factors to determine the upside of an opportunity and to determine the degree of riskBusiness Valuation they perceive to be associated with a potential acquisition target. It is precisely these factors that a buyer uses to determine what valuation multiple to apply to their assessment of your business' normal earnings or cash flow generating ability in order to make an offer.

Company-Controlled Factors Influencing a Business' Valuation

Value Drivers

Value Diminishers

Larger revenue size

Smaller revenue size

Strong revenue growth rate

Declining, flat or low revenue growth

Higher, consistent gross margins¹

Low, inconsistent gross margins¹

High preponderance of negotiated sales opportunities

High preponderance of bid sales opportunities

Higher industry operating margins¹

Low industry operating margins¹

Strong, diverse management team

Company primarily dependent on the owner

Consistent history of profitability

Inconsistent profit history

Strong, sustainable, predictable cash flow

Weak, unpredictable cash flow

Repeat customers

One-time customers

Strong, profitable order backlog

Low, declining-profitability order backlog

Niche products or services

Commodity products or services

Strong barriers to market entry

Low barriers to market entry

Proprietary products or technology

No proprietary products or technology

Low foreign competition exposure

Significant foreign competition exposure

Large market potential

Limited market potential

Several exit option possibilities and buyers

Limited exit option possibilities and buyers

Sufficient working capital to support growth

Inadequate working capital to support growth

Low annual capital expenditure requirements

High annual capital expenditure requirements

Low exposure to technological change

Significant exposure to technological change

Multiple, strong sales distribution channels

Single, weak sales distribution channel

Low customer revenue concentration

High customer revenue concentration

Undervalued assets

Overvalued assets

Multiple revenue sources (pillars)

Single revenue source (pillar)

Strong industry market share

Low industry market share

Strong, recognizable brand identity

Minimal brand identity

Well-maintained equipment

Significant deferred equipment maintenance

Modern, highly productive equipment

Outdated equipment

Low debt-to-equity ratio

Moderate to high debt-to-equity ratio

Not a highly regulated industry

Highly regulated industry

Above-average industry performer

Below-average to average industry performer

Audited financial statements

Compiled financial statements

Nonunion workforce

Unionized workforce

Fully funded liabilities

Unfunded liabilities

Written and assignable customer agreements

Unwritten or not assignable customer agreements

Written contingency plan in place

No contingency plan

Key employee agreements, noncompetes

No or weak agreements with key employees

Written business plan

No business plan

Recent legal due diligence review

No recent legal due diligence review

Clean balance sheet

Balance sheet cluttered with obsolete and personal assets

History of achieving financial projections

Inconsistently meets financial projections

(1)  For companies in general and for the specific industry


External Factors Influencing a Business’ Valuation

Value Drivers

Value Diminishers

Merger and acquisition market is active

Merger and acquisition market is down or flat

Company is in a growing industry

Company is in a mature or declining industry

Economy is growing

Economy is recessionary, flat or hardly growing

Interest rates are low

Interest rates are high or rising rapidly

Strategic buyers have cash on hand

Strategic buyers are holding onto their cash

Private equity buyers are investing

Private equity buyers are not buying/investing

Transaction financing sources are lending at higher turns of EBITDA

Transaction financing sources are lending at much lower turns of EBITDA

Transaction taxation rates are low

Transaction taxation rates are higher


Some of the above value drivers are more important than others. Many of these can be analyzed and addressed as part of a comprehensive “exit planning” process.

If you have any questions or would like to confidentially discuss how these factors relate to your business’s valuation, please contact me for a free consultation.

Bill Quish is a Mergers and Acquisitions Advisor and Certified Exit Planning Advisor (CEPA). He is a Senior Managing Director at Lyons Solutions, LLC. He can be reached at 860-391-8672, bquish@lyonssolutions.com or bill@mergermaven.com.


Copyright 2010 Bill Quish. All Rights Reserved.