Intangible issues in valuing a business

The key source of value of your business may be something which cannot itself be measured:

Strong relationships with key customers or suppliers may be critical. For example: If a business holds the country licence (or distributorship) for a product which is expected to be successful, its value will increase accordingly.

Management stability may be crucial, if the purchaser does not have a strong team. If the owner-manager or other key people are going to leave, the business may be worth less (for example, an advertising agency may collapse if a creative person leaves, if key salespeople leave, they may take important customers with them, etc.).

Check any restrictive covenants contained in employees’ contracts. The covenants could add value if the employees form an integral part of the business. But they could also damage the value if a potential buyer intends to radically change the staffing arrangements.

The more risks there are from a purchaser’s perspective, the lower the value will be. 

There are specific actions you can take with a view to building a more valuable business:

Set up excellent management information systems, including management accounts.
Tie in key customers and suppliers through contracts and mutual dependence.
Minimise exposure to external factors (i.e. exchange rate fluctuations, etc.).

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