What factors reduce the value in my business?

Simon Glover

In simple terms, think of the value in a business as being directly linked to inherited or perceived risk – the lower the risk, the higher the value. Therefore any features which raise the risk profile of a business will erode value. Common examples include:

  • Project-based businesses: if your business operates via large, standalone project work, with perhaps just three or four substantial projects per annum, this brings with it a higher risk profile.
  • Shareholder dependence: if the business is wholly dependent on the know-how of the founder shareholders, who wish to leave the business immediately after sale, this could represent a significant drag on value.
  • Customer concentration: if one of your customers represents say, 65% of your revenue, with the percentage increasing year-on-year, this translates directly to high risk.
  • Margin erosion: with EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) being the most commonly used metric for valuation, businesses which show a declining EBITDA margin will be viewed as more risky than one where EBITDA margins are stable or growing.

There are many other examples that can be quoted – for example, a shrinking business with year-on-year decreases in the top line, substantial pending litigation from an aggrieved former employee or from a wave of product warranty claims. Or on more than one occasion, the existence of an exotic tax optimisation scheme taken out in the past, which HMRC now take an increasingly dim view of. Whatever the issue, you can be sure that a buyer’s due diligence exercise will uncover it, so far better to be on the front foot in terms of disclosure so as not to erode a buyer’s confidence and goodwill.

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