5 Factors Impacting the Value of Your Business
Updated: Dec 20, 2019
The value of a business is impacted by many factors which may change from year to year. Here are five factors that might impact the value of your business:
1) Financial performance of the business – If the business has been growing and earnings are increasing, the value of the business is positively impacted. The converse is true, if the business has poor earnings, the value may be negatively impacted. To maximize your company’s value minimize those discretionary expenditures and work on developing increased sales.
2) Growth prospects for the company – Revenue growth drives most of the opportunities for a business to expand. Just as too low a growth rate may have a negative impact on the business and its ability to be profitable, an exceptionally high a rate of growth may lead to negative operational and financial consequences. Growth rates should exceed industry benchmarks for a better valuation. Look for opportunities to expand into related markets.
3) Competition in the industry – The business’s competitive position can impact the value of the business. If the industry in which the business is operating has become more competitive due to entrance of new competitors or the strengthening of existing competitors, the value of a business may be impacted from a loss of market share, lower revenue growth, shrinking margins and lower profits. Positioning the business to maintain or increase the company’s market share without negatively affecting its profitability will have a positive impact on the value of the business.
4) Effective management – The individuals managing the business also influences the value of the enterprise. A highly experienced management team or an organization with depth in managerial staffing is valued higher than an organization with only one manager or key executive that influences the direction of the company. Help develop your management team to reach their highest potential.
5) Economic and industry conditions – The conditions in the industry and the strength of the economy impacts all businesses within that industry one way or another. If adverse conditions exist, it might indicate lower long-term growth potential and the profitability for a business, negatively impacting its value. Industry conditions are impacted by the state of the economy, but are also influenced by technological changes, demographic trends, social views, and competition to name a few. Staying on top of industry trends, customer demands, sustainability issues and your competition’s business will help you maintain your business’s value.