Determining Corporate Valuation – Beyond the Basics

By training and education, many business appraisers primarily emphasize the numbers.  However, there are many other factors that make a company unique or special, which can dramatically increase value. Below is a list of some of the items to consider when determining the value of your company. Of course, it is highly recommended to work with an experienced team of advisors who can combine these elements with real-world deal experience, strategic perspective, and industry analytics to determine the most accurate valuation.

Financials: First and foremost, appraisers will consider all the basic financial figures such as:

  • Growth rate
  • Return on investment
  • Gross profit percentage
  • EBITDA percentage
  • Industry metrics
  • Debt to net worth
  • Book value
  • Pending capital expenditures
  • After purchase cost saving

Fundamentals: Next, business appraisers typically look at the fundamental elements of the business including:

  • Company history, management and culture
  • Products
  • Distribution
  • Pricing elasticity
  • Status of employment agreements and non-competes
  • Cross selling opportunities

Unique Attributes: There are often unique attributes of a company, in addition to the items above, that make it more attractive to a possible acquirer and/or more valuable. Examples are:

  • Company or product brand name/identity: It doesn’t have to be Coke, but a name that might be well known in a specific geographic region, or a name that is identified with a specific product are big pluses.
  • Dominant market position: A company doesn’t have to be a Fortune 500 firm to have a dominant position. Being the major player in a niche market is a dominant position regardless of how small it is.
  • Customer lists: Mailing lists and subscriber lists demonstrate a unique loyalty base that may allow the company to charge a higher price for its product or service.
  • Intangible assets: Examples of intangible assets that can create value are a long and favorable supply agreement, proprietary software, a strong distribution channel, etc.
  • Price Advantage: The ability to charge less for similar products is a unique factor. Alliances with designers or manufacturers can be built to create low costs and subsequent price advantages.
  • Difficulty of replication: A company that produces a product or service that cannot be easily replicated has an advantage over other firms.
  • Proprietary technology: Technology, trade secrets, specialized applications, confidentiality agreements protecting proprietary information – all of these can add up to add value to a company.

There are certainly other unique factors that give a company a special appeal to a prospective purchaser and, at the same time, increase value. Intimate knowledge of the company, the industry and the M&A market is needed to go beyond the basics and determine a realistic, objective and fair valuation.