In addition to the size and the type of company, other value drivers and value detractors factor into a valuation, says Russell Warren, president of The TransAction Group, a mergers and acquisitions advisory firm in Cleveland.
“A plus might be that they have developed new products and continue to have new product offerings coming out,” says Warren. “That would be a real positive for most people if those are good products.”
Patents or other intellectual property — brand names, proprietary products, etc. — can also be value adders, says Warren. So can having a large market share and a strong brand. And being No. 1 or No. 2 in the market is going to make your business very appealing.
On the other hand, a lot of small businesses are dependent on one or two customers, and that is typically seen as a value detractor, as is overdependency on suppliers.
And in many small businesses, you often have one key person doing the job of several people.
“They wouldn’t have a marketing person and a financial person and an operations person,” says Warren. “Usually it’s the owner that often does this, and if he wants or she wants to leave, then a lot of that value goes away.”
Also, if the business is highly vulnerable to competition from lower costs — such as offshore competitors or outsourcing — there’s no way to defend against that, he says.
