Key Factors that Influence the Value of a Business

By Heather Deskins, CPA/ABV/CFF, CFE, CVA

Do you have clients that need a succession plan for their business, but don’t want to invest in a business valuation? If they don’t know the current value of their business, what if the business isn’t worth what they thought it would be? Will they be able to retire in five years or will they have to hold-off transitioning their business until it reaches a certain value?

Well, here are some key factors that can influence the value of a business:

  • Historical and future earnings – Historical earnings can be used to project future earnings. It is important that the business report ALL company revenue and ONLY company related expenses.
  • Current contracts and accounts receivable – Customer relationships are an important factor. Having current contracts with customers ensures prospective buyers will have work to carry on and high quality accounts receivable brings assurance that the receivables will be collected.
  • Assets (Inventory, equipment, real estate) – Review assets to determine if any are considered obsolete and need replaced. Assets are more valuable when they are in good working order!
  • Company Reputation – We are not in Hollywood where any publicity is considered good publicity. Be aware of what customers and competitors are saying about the business. Are there any areas of your business that can be improved?
  • Supplier relationships – Just like customer relationship are important, so are supplier relationships. When suppliers are paid on-time and they deliver products when needed, that positive relationship will be an asset to a prospective buyer.
  • Customer concentration – If the business relies on a few customers and one of the largest customers goes out of business, how would this affect the business? The more customers a business has, the less impact it has when losing one.
  • Strength of management – This refers to the amount of knowledge upper management has about the business. Would the business run as smoothly without the business owner there? Can upper management take over, if needed?
  • Market factors and industry outlook – Identify market factors that have an impact on the business. Does an increase in interest rates have a negative impact on the business? Is there a positive outlook for the industry? Is the industry experiencing rapid change and is the business prepared for this change?

Even without knowing the value of their businesses, clients can reflect on these key factors to determine if any changes are needed in order to capture a more favorable and enjoyable transition in the future.

If you or your clients have questions on valuing a business, please contact P.D. Eye Forensics, LLC at 614.722.7914.

Heather Deskins, CPA/ABV/CFF, CFE, CVA

Heather Deskins,

Managing Member
P.D. Eye Forensics, LLC