What makes a business valuable?
There are a number of factors which contribute to the value of a business. Listed here are the ones considered to be the most important.
- Area of activity: certain areas of activity are perennially viewed as attractive ones for acquisition, with corresponding value attribution. Examples include aerospace, defence, education, energy, financial services, healthcare, infrastructure, media, manufacturing, support services, technology and telecoms.
- Revenue model: businesses with a revenue model which includes an element of recurring revenue are particularly highly prized. Common examples might include Software as a Service (SaaS) companies, subscription-based media or content businesses or service providers with multi-year contracts.
- Scale: put simply, the bigger the business, the more value it will have. Larger businesses are more robust, and more capable of weathering the storms that all companies have to endure over time.
- Profitability: with EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation) being the most commonly used valuation metric, it is important that the business can evidence a strong track record of profitability.
- Growth: a consistently growing top line shows that a business is in good health, providing products and/or services which are demonstrably in demand. In turn, this indicates that the business is well placed to grow beyond its current size, leading to further value creation.
- No owner dependence: in circumstances where the selling shareholders wish to exit the business, it creates significant value if the company has a strong and high calibre senior management team outside of the shareholders. This in turn gives an acquirer the comfort that the value in the business does not reside in the heads of those individuals leaving the company.
- Customer base: a well spread customer base, with no single customer account representing a significant percentage of revenue, will build value and provide acquirers with evidence that the company’s revenue is not overly dependent on any decision from a single customer.
Of course there are plenty of other examples of value creation within a business – e.g. a portfolio of proven and protected Intellectual Property, or gaining access to a group of highly talented employees in a sector where recruitment is difficult.
However, the list above represents the factors most commonly seen. And if your business can put a tick next to most of these, then congratulations – you’re already building value.
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