Determining the value of a business is no easy task and many professionals dedicate their careers to doing so. Still, even if a company turns to professional consultants for a business evaluation, it’s wise to understand how the process works. That’s why business expert Kenneth Loeb is going to share some insider insights.
“Business valuations are as much an art as a science, and you have to take a lot of factors into account,” Ken Loeb argues. “Whether you’re looking to acquire a business or to evaluate your own company for a potential sale, it’s smart to do your homework and to take a proactive role in the process.”
A business evaluation is a process through which the general economic value of a company or unit within a company is determined. Often, this involves pouring through a balance sheet, which shows a company’s assets as well as its liabilities. While homing in on revenue streams may sound tempting, a lot of other factors must also be considered.
For example, if a company owns an impressive real estate portfolio, and that real estate will be part of the sale, it needs to be considered closely. The real estate itself could offer a tremendous amount of value. The same is true of machinery and other assets.
“You certainly can’t forget physical assets when conducting a business evaluation,” Kenneth Loeb notes. “In some situations, the real estate or other physical assets may make up a majority of the company’s value.”
It’s not all about physical assets. Intellectual assets, including patents and copyrights, are also important. Companies often acquire other companies to take control of vital pieces of intellectual property.
Employees and their intellectual knowledge are important considerations. Evaluating the value of employees and their knowledge is difficult because employees can typically leave at any time, taking their knowledge and value with them.
“When looking at employees,” Ken Loeb says, “you need to consider employees likely to retire or otherwise leave the company. This gets tricky because internal politics, team morale, and other hard-to-quantify aspects come into play.”
Current employees play a crucial role in determining a company’s ability to scale and sustain growth. If key leaders or employees leave en masse, a company’s momentum could quickly dissipate.
It’s important to understand that business valuations don’t just cover how valuable the company is at the moment, but also how valuable it will be in the future. If a company is enjoying strong growth and owns assets that could provide more value in the future, this must be taken into account during the valuation process.
“One of the biggest factors for a company’s value is its growth potential and projected future earnings,” Kenneth Loeb says. “You should consider a range of scenarios regarding future growth, including slow or declining growth.”