In the United States, business valuation is an 8 billion dollar industry. Yes, you read that correctly. Whether a company is looking to sell or not, the ability to understand its value is imperative in a variety of capacities from acquisitions to internal restructuring, from retirement and succession planning to external investment, from share swapping to partner separations, and numerous additional scenarios. Unfortunately, far too many business owners put off a valuation and are left scrambling when unforeseen life events arise, wishing that they had valued their company at an early stage in its lifecycle.
Business valuation is a complicated, intricate practice and many executives overlook the fact that financial statements seldom paint the entire picture. In fact, it is rather common to value two comparable businesses at the same time and come up with two different values. The reason? Key value drivers play a monumental role in determining a company’s financial constitution, and they are not always financially-based factors. A company’s value can no longer be determined while looking through a strictly financial lens. Today, we highlight some surprising elements of a business valuation, the non-financial business drivers:
- Human Capital: from employees’ reputations and years of experience in the industry to general employee satisfaction and even value-added per employee, the people in an organization play a significant role in a company’s value.
- Management Team: the ability to manage talent is extremely valuable for a business to be profitable long-term and identifying the lengths of manager contracts and the incentives offered in them paints an important picture of potential business success and value.
- Customer Experience: in today’s competitive market landscape, customer-focused organizations are using analytics to ensure that their end-users are satisfied. From customer feedback to general interaction with the company, measuring a customer’s experience is critical to determining a company’s value.
- Curb Appeal: it may seem outlandish, but the physical appearance of a company is important. From the actual office space to the website/social media presence and the look of the software/hardware, even down to the company’s logo – the way a business looks matters when it comes to its value.
- Growth Potential: historical performance is certainly an essential factor in business valuation, but the ability to leverage that to force growth and expansion is vital. There is a major issue if a company is currently operating at its peak capacity, so identifying a growth catalyst is certainly a key value driver.
- Diversification: a central aspect in mitigating risk, a diversifying customer base, products/services lines, and even supply sources are all important gauges in a company’s value.
- Internal Processes: having systems in place tells a potential buyer that a company is efficient and structured. Systems like personnel processes, quality assurance, production processes, and the like all indicate that an organization is thinking about operations as it relates to profits and operating costs.
- Culture: a brand is often measured from an emotional perspective, outlining the how and the why of the way in which a business operates. A company’s culture is the combination of each element in the business, from people to process and everything in between. Though culture cannot be measured by figures, business values are certainly impacted by a brand’s reputation.
While most of the above key value drivers are difficult, if not impossible, to apply and measure numerically, they do provide an important reveal of an organization’s strengths and weaknesses. As such, utilizing innovative approaches to measure a company’s value in terms of non-financial drivers can provide a constructive comprehension of an organization’s overall health.