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7 Items That Affects A Company Value, Other Than Profitability

There are several factors beyond profitability that can affect the value of a business. By minimizing the perceived risks—operating, financial, market, and legal—this will lead to maximized value.

1. Strong management. Senior positions staffed with proven professionals give buyers confidence. Implement employment contracts, non-competes, successor plans, and equity incentives. Recognize talent shortcomings and seek out appropriate candidates.

2. Customer diversity. When no one customer accounts for more than 5%-10% of a seller’s revenue, it’s a positive factor. Alternatively, long-term contracts with primary customers are also attractive.

3. Contractually recurring revenue. Maintenance contracts, service agreements, and licensing fees are future revenue streams buyers like to see, as are sole-source agreements and minimum-purchase-level contracts.

4. Robust IT and financial reporting systems. Strong systems that track, analyze, and report financial and operating metrics boost seller credibility. A lack of systems will factor into the negotiated price.

5.  Propietary Elements. The market rewards proprietary products, unique operating processes, or value-added services over commodity-like alternatives. They are key differentiators and demonstrate a competitive advantage.

6. Intellectual property and brand equity. Patents, trademarks, and recognizable brand equity can positively impact value. Legally secure the rights to assets. Ensure intellectual property licensing agreements have been well managed.

7. Professional financial statements. Reviewed or audited financial statements reduce perceived risk. Seek out a reputable CA firm for a review or audit engagement.

In summary, company profitability is an important factor when determining the price of a business, however, the value of a company also increases when the risks of operating a business decrease.

Regelle Partners Inc. 2012