What factors reduce the value in my business?
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. 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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