Earlier, in part one of this blog series, when weighing methods of business valuation, we brought you the six forms of measurement professionals use to determine how much a business is worth. But as some of those factors rely less on a balance sheet’s numbers and more on a subjective feeling, an interesting question was raised.
Beyond cold hard profits, what exactly makes a business valuable?
It’s a hard question to answer either way you look at it, as true value is in the eyes of the beholder. However, there are eleven business components that are always important to a potential buyer, and if you can judge what these might be worth according to Going Concern Value, you might be one step closer to determining your business valuation.
1) Retained Earnings
Simply put, retained earnings are the profits that are made, but not used or spent for business purposes later. It’s salted-away income that acts as a cushion of security and profitability, while reason stands that a healthy business’s retained earnings would only grow with time and care.
2) Income Generating Assets
As the name suggests, any sort of asset that brings in it’s own profits with very little, to no maintenance is extremely valuable – a perfect example of this being owned real estate.
Infrastructure applies to any form of assets, technology, systems, or software that is owned and operated under the sole purpose of generating income and clientele; such as computer systems or a website.
4) Client List
As a large majority of sales are made by returning customers, often a list of satisfied, long-term, committed clients who will continue to buy from a business throughout the foreseeable future, is valuable in itself.
Able to either negatively or positively impact the value of a business, a company’s creditworthiness must be taken into account. If the business has good standing with the bank, that can be an added bonus. But if the company is in debt or has a poor credit history, digging out of penalties and a bad reputation can be costly.
Perhaps the most subjective, simply put, the value of a brand can be judged by what a customer feels for the business or is willing to pay for the brand itself – such as a designer clothing label.
7) Intellectual Property
Essentially, the skill, knowledge, or already-trained staff it takes to execute business operations can be worth something in itself.
Similar to intellectual property, talent reflects the value found in the employee base and the service they can offer their clients. If training, employee retention, workplace culture, and customer service is high, so will the talent value be.
Prime real estate for a storefront is a big sell point for businesses, but so is a well-designed website that gets lots of traffic. The better the corporate location, the higher the valuation.
10) Intangible Rights
For those with unique permits, licensing, protections, or trademarks, a business can be marked at a higher value simply for the fact that such legal rights are hard to come by and competition is often slim.
11) Social Platform
Word of mouth is a powerful tool for businesses, and none more so than in today’s technological age. Even something like a popular social media presence or communal platform, can raise a business’ value in the eyes of a buyer if it means a higher chance for potential customers.
All in all, determining your company’s valuation may not be an exact science, but with these eleven considerations and the six factors of measurement, it may not be quite as impossible as you think.