Shareholders of closely held companies, as well as parent corporations of publicly held divisions, often seek advice as it relates to corporation valuation and the value of their holdings. While determining the value of a corporation is a complex analytical exercise, there are a number of qualitative factors that indirectly affect value as well as the interest level by prospective acquirors or investors.
Valuation is based on a number of different methodologies that are dependent on the unique financial metrics of a subject company, valuation metrics of similar companies, and industry-specific characteristics, among other factors. But equally as important as the analytical exercise of determining value are the qualitative factors that influence it. Listed below are selected factors that often influence whether companies receive discounted or premium valuations:
- Company Revenues and Operating Profit. Companies with larger revenues and operating earnings before interest & taxes (EBIT) typically command higher valuation multiples.
- Customer Concentration. Minimal customer concentration significantly reduces the risk of lost revenues and operating margin degradation and bolsters valuation levels.
- Industry Growth and Competitive Dynamics. Positive industry growth and competitive fragmentation improve a company’s growth prospects and have a positive impact on value.
- Product/Service Line Diversity. A diversified line of products or services often increases customer retention and reduces risk of lost revenues.
- Reliance on Suppliers/Inputs. Minimal reliance on suppliers reduces overall business risk.
- Regulatory Limitations. Industry-specific regulatory oversight or risk of industry-related legislation may have an adverse effect on a company’s risk profile.
In addition to the aforementioned factors, valuation is affected by ownership aspects such as the marketability (or lack thereof) of a company’s stock on a freely tradable market as well the control or influence with respect to corporate governance.
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Opus Advisory Partners provides valuation and fairness opinion services to boards, shareholders and senior management of companies and divisions. In addition, our firm provides advice on a range of transactional, financial and strategic advisory services that include valuation as a core component.