Understanding the value of your business is crucial for your growth prospects. You need to understand how much the business is worth to help you raise money for the development plans. The valuation also comes in handy when you want to sell your business for the right amount.
You must have probably heard before that your business is worth as much as someone is willing to pay. However, in most cases, it is up to a valuation to determine a starting price. Here are some factors that determine your business valuation.
- Growth prospects
The growth prospect is your company’s growth potential in the long run. Various businesses have different growth potential. Have a projection of what your business would achieve some years down the line.
Determining the growth prospects involves various possibilities. The first option is to look into the business growth model irrespective of the industry. The next is to understand the industry’s growth rate. Your business is likely to grow if you are in an industry with high growth potential.
- Financial performance
Your revenue trend determines how much the business is worth. A business that has a growing revenue over time tends to have a premium value in the average market compilation. On the other hand, if the business has a low, flat, or declining financial performance, then be sure of getting the lower ratings.
Take note of the type of revenue. For example, a sustained growing revenue commands a higher value compared to a business that has just grown due to a one-off project.
Just like with real estate, location is everything when it comes to business value. The location determines the accessibility of the business to clients. It also determines access to other value-added services which will improve your value in the long run.
A business that is already big in a less conducive location is less valued than a growing business that is in the best possible location.
- Customer concentration
The presence or magnitude of customer concentration determines the value of your business. It is quite risky when you depend on a few or even a single customer for all your sales. For example, with all the other metrics equal, your business will score lower if you depend on a single customer for 50% of your sales while another business has a diverse range of customers for their sales.
However, you can still turn around the customer concentration aspect by becoming a sole source supplier or having a long-term contract with big clients.
- Staff and management
Your staff and management determine how valuable your company is. Even though you are starting up, if you have competent and qualified talent then your business will gain the needed market traction within no time. Keep around a team of experienced management and employees who will work to ensure your business meets its goals for sustainable growth.
In the end, evaluating a business is an art; you can never exhaust the possibilities. The variables might change from company to company or the industry. However, whatever you do ensure your business is in the right location, has a diverse market, and invests in a qualified workforce.