If you are planning to sell shares of your company or seek money from investors, you will likely need to provide these parties with information regarding the current and potential value of your company.
Projections regarding the future value of a business are made to utilize a business valuation process. This process takes into account many different factors that can help determine how well a company will perform over time.
Here are three important factors that could have a significant effect on your company's present and future value.
1. Operational Risk
All companies face a certain level of risk when it comes to the day-to-day operations. Some of these risks are internal, but many are external and related to the market conditions in which a company must operate.
In order for your company to retain its value over time, you must be able to scale your company's business activities at a moment's notice. The ease with which you are able to ramp up production or scale back services while still remaining profitable is your company's operational risk. This risk plays a critical role in determining the value of your business.
2. Customer Concentration
Another important factor that can influence your company's total value is its customer concentration. You should evaluate where your company's profits come from. Do you have a diverse customer base, or are your profits generated from a few large accounts?
The more diverse your customer base is, the easier it will be for your company to survive losing a client. Customer concentration plays a critical role in determining the overall value of your business.
3. Industry Resilience
One of the external factors that can affect the value of your business is the industry in which you operate. It's important that you are able to show that your industry has enjoyed a steady growth rate in the past.
This positive past performance can be a good indication that the industry can withstand market fluctuations, ensuring that your company will be able to operate within a profitable sector over time. Being able to show industry resilience will help you increase the value of your business when completing the business valuation process.
Being able to determine the value of your business is beneficial when you want to expand, gain new investors, or secure financing for company improvements. Knowing some of the factors that can affect the value of your business will help you successfully navigate the valuation process in the future.