Beyond The Price Tag: Non-Financial Considerations In Business Valuation

It’s easy to be swept up in the flood of advice and methods for valuing a business. A quick internet search provides almost infinite resources right at your fingertips. From more general approaches to specific analyses, there is a lot of financial data to parse through, regardless of the methods you choose.

While these are incredibly useful tools, they offer a buyer an incomplete picture of a business’s true value. As anyone who has owned their own business will tell you, there is far more to it than finances. Though not an exhaustive list by any means, below are several non-financial aspects of the business to consider during the valuation process.

Reputation

Although it is not quantifiable in the same way that EBITDA multiples or net asset values are, reputation can drastically alter how much a business is worth to a buyer, and for good reason. The collective opinions of the employees, customers, and media form a critical component for success and present a lot of insight into how a business runs and what will be needed to keep it going.

A bad reputation, filled with 1-star reviews and negative media attention, could require significant effort, time, and funds to turn around. In some cases, it may be necessary to completely rebrand and remarket the business in addition to doing the legwork required to handle customer complaints and build positive experiences and press. On the other hand, a company with a stellar reputation offers a lot of promise to a buyer without requiring effort, time, or funds.

Taking a little time to research the world’s perception of a business can show what you are in for and, thus, how much more or less you are willing to pay when performing a valuation.

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Stage of Business Life Cycle

Depending on your preference, a business’ life cycle stage can also impact its valuation. A post-launch start-up — perhaps one that is starting to show signs of growth but has yet to solidly plant its feet and establish itself in its own right — can provide a lot of potential and an equal amount of risk. Buyers that take a more “high risk, high reward” stance might prefer to purchase such a business, welcoming the chance to grow it to new heights and defying any possibility of failure.

A more cautious buyer would likely be drawn to a well-established company that has been steadily successful for years and is comparatively low risk. In such a case, reliability adds value rather than the opportunity for exponential growth. Ultimately, how much a business is worth based on its life cycle stage is up to you and what you value.

Company culture

Company culture is widely recognized for playing a key role in mergers and acquisitions following a sale, as the effects of integrating two cultures can ultimately determine whether a transaction is successful. Though it remains an important part of the integration planning process, it is less often acknowledged as a beneficial metric during business valuation.

Given the crux of company culture’s role in post-sale success, you should consider it carefully. Buyers may be inclined to pay less for a business that does not seem like a good cultural fit but may be willing to pay more for a company with a culture that is a good fit or that can quickly adapt to fit the existing culture.

Employees

In many businesses, employees are the most critical resource. They are vital to an organization’s success, running it at all levels and helping to shape its reputation; as such, the value added by their caliber and likelihood of remaining after a sale should be considered.

For example, employees who are industry experts or who have accrued valuable, unique knowledge during their long tenure with the business cannot be easily replaced; buyers must weigh the benefits of gaining such knowledgeable employees with the risks of losing them if they disagree with the sale and resign.

Factors such as employee cross-training and turnover rates should also be considered. The risk of losing specific employees decreases if sufficient cross-training has occurred to mitigate their departure. High levels of turnover, when compared to similar businesses, increase the chances that a buyer will have to spend substantial time and money to recruit, rehire, and retrain employees.

Location & Real Estate

From tax rates to competitive advantages, location, and real estate hold substantial weight when valuing a business. A business’ ideal location will vary from buyer to buyer, and the inclusion — or lack thereof — of real estate in a sale can significantly raise or lower a buyer’s bid. Some helpful considerations for a business’ desirability are real estate taxes and regulations, opportunities for expansion, and any strategic benefits gained from operating in the business location.

Many more non-financial aspects can be considered during the business valuation process, and each is determined based on buyer preference, just like those listed above. While not providing a concrete number like a price/earnings ratio or a dividend yield, these facets of a business offer a sense of how much more or less you would be willing to pay and how much wiggle room you are willing to concede during negotiations.

Author

Ember Pitrof, Transaction Support Analyst, Benchmark International