non-financial

1. The type of industry

This might seem obvious to some, but not all industries are made equal. Typically the sector you are involved in would influence how appealing it is to investors. It usually comes down to how scalable the business is and how quickly they could get their return on investment.

For instance, a Technology or SaaS business would have a higher valuation than a manufacturing company. This principle is reflected in valuation tools that use profit multipliers.

2. The Number of SHAREHOLDERS

I would consider it detrimental from 4+ shareholders. Every investor would have a different threshold, and typically, it comes down to the difficulty of the negotiations and whether 100% of the shares are being acquired or not. Typically, if only a part of the shares are being disposed of, the value of the business would be significantly impacted.

3. Products and Services

This requires a deeper understanding of the business sector and how versatile the company is. To put yourself in the shoes of an investor, you would like to have an establishment that is as risk-free as possible. To be more bulletproof, you would want to look a parameters such as the locality, the type and number of customers, the product/service diversity, the cost of operations, etc.

Lastly, timing is everything. A car dealership would rely on finances to sell a car would be valued more when interest rates are low and vice versa.

4. Market and Marketing

In correlation with the point above, the locality and diversity of the company will drive its marketing strength. Equally, a business that has a strong local and online presence will attract more new customers and therefore more valuable.

5. Facilities and offices

There is no doubt that a business that is not tied to a physical location is more scalable. However, the majority of companies in the UK would require to have either a leased or owned property to run the operations. In the valuation of the business, we would take into consideration the possibility of expanding within the current building. If the business plan is to double in size in two years, would it require to move to a bigger premises? If that’s the case, it could impact the profit margins and therefore the valuation of the business.

6. Equipment

As specific as the equipment might be, it can be an asset or a liability to any investors. We can often see this happening in well-established businesses that have been running their machines for decades. To the current owner, it works perfectly fine, but in the eyes of an investor, competitors run newer equipment with a better productivity yield. Furthermore, older machinery would require more maintenance and would be more prone to failure. All of those elements can come to a high cost to renew them.

However, if this is your case, you are not doomed. Older equipment would have more value with a strict and regular maintenance plan. Each machine would have a maintenance plan and frequency recommended to enhance its longevity. Being able to provide a logbook and a maintenance policy can work in your favour.

7. workforce

Especially in small businesses, it is common to see the founder of the business wearing multiple hats. When it comes to the acquisition of the company, the current owner will more than likely leave his position. During the valuation of the business, the cost to recruit a replacement may have to be deducted especially if there are multiple roles to fulfill (e.g.: a director and bookkeeper).

8. Others

In business valuations, there are countless elements to consider and they would vary from one company to another. This may include the products and demand, the competition, the location, the management structure, the systems in place, the presence of trademarks or patents, etc. Any of those elements can contribute to the increase or decrease in the value of a business.

financial

1. Financial statement

Probably the biggest factor that would contribute to a business valuation is the financial situation of the company. You would easily come across business valuation multipliers based on annual profit. Overall, most of the data needed in a standard financial statement made to HMRC as well as the Profit and Loss (PnL) report. Most account analyses would consider the past 3 to 5 years to measure the business growth rate and stability.

However, post-COVID-19 pandemic most businesses would have been impacted either positively or negatively financially which can make certain analysis more difficult. As time goes we will have more stable financial reports to analyse. I tend to ask for another year of data pre-pandemic to see if the company returned to its previous state or is still suffering from the situation.

Noting that the financial situation of a company during 2020 and 2021 can be good indicators of business resilience if we were going to face another pandemic in the future.

Lastly, for start-up or newly incorporated businesses (under 3 years of operations), bank statements are more likely to be asked for a more accurate valuation. These businesses would normally have more volatility than others, and typically they would require a unique deal structure to make it viable for both parties.

2. Assets and capital

In most cases, the value of the business is influenced by the asset list and working capital that is currently in the company. When analyzing an establishment with no assets or cash in the bank, it could be considered distressed. Considering some financial options used by investors are backed by the list of assets, this would make it a risk too high to take for most.

On the other hand, there is the opposite scenario where an established company has accumulated a long list of assets from properties and various investments. In terms of working capital, you would usually want to cover 6 months of expenses to alleviate financial risks.

The assets of a business can be difficult to value and would typically require a third party to carry it out. For instance, commercial properties and machinery can be especially difficult to value.

3. Forecast

For good measures, several investors would look at the future prospects of the business in terms of growth and stability. This is something that would need to be created by the current management team to produce a realistic vision for the company.

The crucial element to have in hand is a previous forecast that was created a few years ago. Based on the predictions and the current situation, you will be able to tell how reliable the forecast can be.

As an example, I once reviewed a forecast from a company that predicted to grow from £200k turnover (t/o) (burning £50k per year) to a profitable £500k t/o in 12 months. However, 5 years ago they predicted to grow to £2 Million t/o by year 2. Let’s just say that I wasn’t impressed.

4. Tax report

Finally, with bigger companies, it is not uncommon to have more thorough financial due diligence. This would include a full analysis of the tax report submitted to HMRC for the past few years to make sure that there are no discrepancies in the accounts.

This is typically extremely time-consuming and would require an accountant or a financial expert to break down the accounts. But, this is a more common procedure if the company is part of a group, and the accounts were consolidated properly.