Factors Influencing Company Valuation

Entrepreneurs and business owners often wonder about the value of their company. These questions typically arise in various situations, such as preparing for a sale, attracting new investors, or simply gaining a deeper understanding of their operations and the assets tied to the business. Ultimately, the value of a company is not just a number – it reflects the company’s story, its performance, potential, and risks. Understanding which factors most influence this value is essential for strategic decision-making by the business owner.

A frequent part of my conversations with entrepreneurs and business owners revolves around the factors influencing company value. I recall a conversation with Mr. Janez, who introduced me to his manufacturing company that he had founded several decades ago. He enthusiastically described his business and proudly spoke about his employees and their expertise, developed over years of operation and enhanced through numerous training programs. In his view, this was invaluable.

I explained to him that while these "intangible" elements are indeed important, company value is determined by much more. Measurable factors – such as financial performance, financial position, the organization of processes, and strategic advantages – carry significant weight. Unfortunately, in some of these areas, Mr. Janez's company was lacking. Precisely because of these diverse influences, we at Targo Finance developed a framework for assessing the value drivers of a business. This indicative review does not provide a direct valuation but serves as a diagnostic tool to identify the strengths and weaknesses of a company.

Key Drivers of Business Value

When determining the value of a business, a variety of both quantitative and qualitative factors must be considered. Some of the key drivers include:

Financial Performance and Position

• Revenue, Profitability, and Cash Flows: Companies with high and stable revenues, strong profits, and positive cash flows typically have higher value.
• Liquidity and Capital Adequacy: A healthy financial position reduces risk for investors.
• Debt Levels and Working Capital: Low debt provides greater flexibility and lowers risk. Appropriate levels of working capital are also crucial.

Company Size and Market Position

• Larger companies often have higher valuations due to economies of scale, stronger brand recognition, and lower risk of failure.
• Market share and competitive advantage significantly influence perceived value.

Sales-Specific Characteristics

• Customer Diversification: Companies that are not overly reliant on a few customers are more attractive to investors.
• Contract Length: Clearly defined and long-term contracts provide revenue stability.

Organizational Structure and Process Maturity

• Efficient operations and a well-organized structure increase operational performance.
• Clear organizational structure and documentation simplify knowledge transfer and management.

Employee Knowledge and Competence

• Companies with highly skilled employees enjoy a competitive edge.
• It’s crucial that this knowledge is embedded within the organization and transferable.

Business Dependencies

• Key Person Dependency: Companies that rely heavily on a few individuals pose greater risk.
• Supplier Dependency: High reliance on a limited number of suppliers can reduce business value.

Other Important Variables

• Regulatory Environment and Compliance: Compliance with legal requirements reduces legal and reputational risks.
• Market Outlook: Industry or regional growth potential enhances company attractiveness.

Indicative Review as a Tool for Improvement

Our approach is based on a model that gives entrepreneurs and business owners insight into their performance across various areas. The analysis yields an overall weighted score that shows how the company compares to its industry peers. This score is not a direct valuation but serves as a basis for discussion and improvement planning.

Review Process:

1. Data Collection: A detailed analysis of financial indicators, organizational processes, and market positioning. This includes interviews and discussions with company management.
2. Financial Benchmarking: We assess how the company compares to others in the same industry.
3. Identification of Strengths and Weaknesses: We identify areas of strong performance and those requiring improvement.

Conclusion

Understanding the factors that influence company value is crucial for effective management and strategic decision-making. Whether preparing for a sale, seeking investors, or focusing on internal improvements, a comprehensive business review is the first step. By focusing on financial metrics, organizational structure, and market positioning, entrepreneurs and business owners can enhance their company’s value and ensure long-term success.

Author: Marko Kašan, Targo finance d.o.o.