What Really Impacts Business Value? Key Factors Explained

Whether you're selling your business or engaging in a few other kinds of business planning projects, having a true grasp of business value is of the utmost importance. What affects business valuation, and which key variables will help you determine your precise valuation for any purpose?

At Utah Business Consultants, we're here to help clients around Salt Lake City, Utah and nearby areas with all their business valuation needs, from basic explainers and breakdowns to detailed, nuanced valuation solutions that will help you determine precise business value at any time. What affects business valuation? Here are several key factors.

Tangible Vs. Intangible Value Drivers

As you begin laying out the important elements of a business valuation, it's important to understand the difference between tangible and intangible value drivers. Tangible value drivers are physical assets that have a monetary value, such as equipment, inventory, or real estate.

Intangible value drivers, on the other hand, refer to non-physical aspects of a business that contribute to its overall worth. These could include intellectual property, brand reputation, customer relationships, and more.

Both these areas must be closely examined in order to get a comprehensive understanding of a company's value. Tangible assets can typically be easily quantified, while intangible assets often require more complex valuation methods.

For example, intellectual property may need to be appraised by an expert or evaluated through market analysis. Similarly, brand reputation can be assessed through customer surveys and industry comparisons. It's also important to note that the significance of tangible and intangible value drivers may vary depending on the industry and type of business being valued. For technology companies, for instance, intellectual property may hold greater weight than physical assets.

Key Operational Metrics

In addition to your company's value drivers, there are several different operational metrics that may be used to assess your company's financial performance. Some of the key operational metrics include:

• Revenue: This is the total amount of money your company earns from sales before any deductions or expenses.
• Gross Profit Margin: This metric measures the percentage of revenue that remains after accounting for the cost of goods sold. A higher gross profit margin indicates that your company is able to maintain a healthy profit on each sale.
• Operating Margin: This metric measures the percentage of revenue that remains after all operating expenses have been deducted. It reflects how efficiently your company is able to manage its costs and generate profits.
• Return on Assets (ROA): ROA measures how well a company utilizes its assets to generate profits. It is calculated by dividing the company's net income by its total assets. A higher ROA indicates that a company is more efficient in utilizing its assets to generate profits.
• Return on Equity (ROE): ROE measures the return that shareholders receive on their investment in the company. It is calculated by dividing the company's net income by its shareholder's equity. A higher ROE typically means that a company is generating healthy returns for its investors.
• Debt-to-Equity Ratio: This ratio measures how much of a company's financing comes from debt versus equity. It is calculated by dividing the company's total liabilities by its shareholder's equity. A lower ratio indicates that a company has less debt relative to equity, which can be seen as less risky for investors.

This is just a partial list of metrics - business brokers like ours at Utah Business Consultants can detail a more comprehensive list as needed.

Market and Industry Position

When we talk about "position" within an industry, we are generally referring to a company's market share. This refers to the percentage of sales or revenue that a company has compared to its competitors in the same industry. For example, if Company A has $1 million in sales and its main competitor, Company B, has $2 million in sales, then Company A has a 33% market share (1/3 = 0.33).

Market position is important because it can indicate how competitive a company is within its industry. Companies with larger market shares tend to have more resources and bargaining power, which can give them an advantage over smaller competitors.

How to Strengthen Business Value Before a Sale

If you're planning to sell your business, optimizing its value before putting it on the market is essential. Here are a few ways to strengthen your business value before a sale:

1. Increase profitability: One of the most important factors in determining a company's value is its profitability. By increasing profits, you can demonstrate to potential buyers that your business is financially stable and has growth potential.
2. Improve market position: As mentioned earlier, having a strong market position can make your business more attractive to buyers. Consider implementing strategies such as expanding into new markets or acquiring smaller competitors to improve your market share.
3. Enhance brand reputation: A strong brand can significantly increase a company's value when it comes time to sell. Invest in marketing efforts and focus on building a positive reputation for your brand to make it more appealing to potential buyers.
4. Streamline operations: Buyers are often interested in businesses that have efficient and streamlined operations. This can include implementing automated processes, reducing unnecessary expenses, and improving overall productivity.
5. Diversify revenue streams: A business with multiple streams of income is typically seen as less risky and more valuable to potential buyers. Consider expanding your products or services, venturing into new markets, or creating partnerships to diversify your revenue streams.

At Utah Business Consultants, we're here to help with business valuation and a variety of other services for clients around SLC or nearby areas of Utah looking to sell their business. Contact us today to learn more or get started with our team of experts!