What information do business valuers need?
The business valuation process is both thorough and multifaceted. It involves a series of proven methods, as well as deep market, industry and economic research. This kind of information is crucial in helping licensed valuers determine the fair market value of a company. Business valuers in Perth are trained to provide supporting information to enable company leaders and stakeholders to make informed decisions regarding their operations, finances and future.
One of the most important facets of a valuer’s research is a company’s financial statements.
Valuers look to gain insights into the business’:
- tangible and intangible assets
- liabilities
- revenue and expenses.
This is done by analysing the likes of balance sheets and income and cash flow statements. In this way, valuers collect crucial data points used to review profitability, liquidity and financial health.
Other critical points include an enterprise’s market position, industry trends and competitive landscape. Understanding the company's target market, customer base and competitive advantages helps determine its growth potential and market value.
The results of a valuation can also be influenced by market share, barriers to entry and the presence of intellectual property rights. Physical properties, inventory, equipment, patents and goodwill play a key role tool.
Organisation structure, risk management strategies and growth capacity are also considerations.
The effect of the target market and customer base
Throughout the valuation process, valuers will compile as much information as they can on an enterprise’s customer base and ideal target market.
This influences factors like:
- growth potential
- profitability
- sustainability.
Naturally, these factors play into a company’s overall value significantly.
For starters, the size and characteristics of the target market are important indicators of a business's potential for future growth. A larger target market with significant demand increases the scalability and expansion opportunities, which in turn increases market value.
If the business targets customers with favourable qualities like higher disposable income or specific consumer preferences, this can attract investors and drive up the company’s value.
The customer base represents the existing customer relationships and loyalty that a business has developed. A diverse and loyal customer base is indicative of a strong brand reputation and customer satisfaction.
This could result in:
- increased customer lifetime value
- repeat business
- reduced customer acquisition costs.
Each of the above can boost revenue stability and profitability.
Furthermore, businesses that depend on a smaller number of customers face the risk of revenue concentration and dramatic effects due to the potential loss of customers. These kinds of factors can sway the results of a valuation.
What about risk management?
Risk management refers to the processes and strategies implemented by companies to identify, assess and mitigate potential risks. This refers, in particular, to risk that may impact its operations, financial performance and market value.
This is of paramount importance to a business valuer for most forms of valuation.
The first relevant area for review here is the comprehensiveness and effectiveness of the company's risk management policies and procedures. In other words, the valuer determines the extent to which risks are identified, monitored and controlled throughout the organisation.
A robust risk management framework demonstrates a commitment to mitigating potential threats. This is a highly impactful indicator of value.
Risk mitigation strategies work in tandem with these frameworks and are the valuer’s next focal point for analysis. They will establish whether the company has appropriate measures in place to minimise and transfer risks.
Examples might be:
- insurance coverage
- hedging strategies
- contractual agreements.
Such plans serve to reduce the potential impact of adverse events on the company's value.
Additionally, business valuers consider the company's risk culture and governance. That means looking at leadership’s role in promoting a risk-aware culture, as well as the level of board oversight and involvement in risk management processes.
Value can be increased by fostering a culture of proactive risk identification and mitigation.
What competitive advantages raise value?
Competitive advantage is one of the most significant factors influencing business valuations.
A valuer will first try to determine market positioning. In other words, the company’s market share, brand reputation and customer loyalty within its specific industry.
Another consideration is the company's intellectual property portfolio.
This may include various:
- patents
- trademarks
- copyrights
- trade secrets.
These provide protection and exclusivity that enable the company to differentiate its products or services and maintain a competitive edge. This applies to technology and innovation as well. More specifically, valuers assess the organisation’s ability to leverage advanced technology, as well as research and development to enhance efficiency, product quality and competitiveness.
Next, valuers determine the client’s ability to deliver products or services promptly and cost-effectively. This means looking at the supply chain and distribution networks, reviewing logistics capabilities, distribution channels and supplier relationships.
Finally, they will review human capital and cost structure.
This includes the skill sets, experience and training of key personnel, as well as staff culture and employee retention rates. They will then assess cost-saving strategies, economies of scale and bargaining power with company suppliers.
Summary
In conclusion, gathering and analysing information is the most important part of business valuation.
Valuers will review an organisation’s internal and external environment thoroughly to pinpoint all factors that contribute to its true market value. These range from financial and operational performance to competitive advantage, risk management strategies and target market.
Each has the potential to significantly sway a company’s value. Accounting for this takes rigorous training, experience and qualifications.
Valuations must also be conducted in line with a wide range of official standards and guidelines.
To learn more about business valuation, or to receive a free quote, reach out to one of our highly qualified valuers today.