Ask most business owners how much their company is worth, and they will often provide an approximate figure based on a multiplier of their pre-tax profit margin.
Ultimately, all business valuations are an agreement between two parties. The selling party has a figure in mind. The buying party has another figure, usually much lower. The valuation figure they agree on in the middle is the actual value.
Of course, like house prices, a business valuation is never realised until the company is finally sold.
As part of an annual review of any business, an independent valuation is critical to ensuring you are allowing for all financial elements that could be adversely affecting your value and taking the correct steps to remedy them. It also allows you to demonstrate to future buyers the longevity of your business, the multi-year sustainability of its current value and plans that could be executed to increase it.
But what other key factors might drive down the value of your business when the process hits due diligence and buyers start to look beyond the “book value”? More importantly, what steps can you take to avoid the three main non-financial issues that might decrease your final sales price?
Over-reliance on one narrow market/product/service offering
As we have seen throughout the last 18 months, some companies have seen key markets close and revenue stops. Buyer sensitivity to your dependencies could be heightened as we emerge from the lockdown restrictions and put further downward pressure on final values.
According to Plimsoll’s latest research, we have seen major declines in values in sectors that have been most affected by lockdowns and cessation of customer footfall:
| Sector |
Decline in average value |
| Theatres |
-6% |
| Advertising |
-10% |
| Events |
-8% |
| Travel |
-12% |
| Furnishing |
-11% |
In the table above, the Advertising sector values are down 10%. However, SEO / SEM companies have seen average values rise nearly 11% in the same period. For an advertising company looking to neutralise their exposure to uncertain demand in their core market, acquiring into the SEO market could be an effective way to reduce risk, tap into a more prosperous niche and ultimately protect value.
Plimsoll offers a range of service to help companies pivot towards new markets, find the best opportunities, and eliminate exposure to a narrow audience or offering.
Over reliance on one or two key members of staff
Too many businesses rely solely on the entrepreneurial spirit of a small group of people, often based around the founder. If those key stakeholders leave the business when it changes hands, what impact would that have and how easy will it be to replace them?
That said, achieving the productivity levels required to keep a business profitable in the post pandemic environment is also critical to maintain value. We have seen many industries where balancing those competing forces has been a real challenge. The following industries are those that have seen both their value and sales per employee figures increase in the latest period. They have retained highly productive staff and reaped the benefit:
| Industry |
Sales per employee |
Value change |
| Pharmaceutical Manufacturers |
£775,000 |
20% |
| Tea & Coffee Merchants |
£762,000 |
16% |
| Contract Hire |
£721,000 |
15% |
| Interactive Entertainment |
£599,000 |
15% |
| Toys & Games |
£599,000 |
11% |
| Solar Energy |
£547,000 |
20% |
Plimsoll provides unique comparison studies to allow you to see how your productivity measures up to others in your key markets. If your business does need to retain key, mission critical staff, where can savings or efficiency gains be made elsewhere to ensure the stability of your financial performance?
Getting the balance between key staff retention and maintaining the value of your business is made easier with Plimsoll’s unique insights.
Weaknesses in the supply chain
The last few years have put unprecedented pressure on supply chains as market access changes and customs norms are rewritten in the wake of macroeconomic upheaval including Brexit.
Having an unstable supply chain can leave your business vulnerable to changes outside of your control, and prospective buyers may factor in that weakness when negotiations begin. Having a clear, demonstrable stability assessment of the key components of your supply chain allows you to mitigate weakness and show alternate options.
The level of financial weakness in some markets makes supply chain management more critical than others. If you rely on any of the following markets, where financial weakness is endemic, having an ongoing assessment and a list of alternative suppliers is key:
| Sector |
Perecentage of companies rated Danger |
| Clinical research |
38% |
| Publishing |
30% |
| Flat Glass |
23% |
| Landscaping supplies |
23% |
| Pumps |
22% |
Using the Plimsoll Model, we can assess any company across your supply chain to determine their current financial stability and exposure. With more than 1 million companies assessed, Plimsoll provides the tools you need to identify alternate option should the worst happen.
Protecting the value of your business is continuous. While eking out every drop of profit, minimising outgoings and making the most of growth opportunities will increase the book value of your business, monitoring the intangibles will ensure the ultimate value of your business at sale time is likely to be achieved.
Plimsoll provides all the tools a business needs to assess their value annually, understand the impact of expansion plans on the short and medium-term, and mitigate the things that have prospective buyers looking to drive your value down.
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