Determining the value of your company is not a straightforward task; it hinges on various factors that evolve over time. Whether you are considering selling your business, seeking investment, or simply wanting to understand its worth, it's crucial to adopt a comprehensive approach that captures all relevant aspects of your company. Let’s explore the key components that influence your company's valuation and provide a framework for evaluating any valuation you receive.

‍

1. Methodology Used: Asset, Cash, or Profit-Based

The methodology used to value your company plays a vital role in the final figure. Valuations often draw from asset, cash, or profit-based approaches, but the most reliable valuations employ a multi-based approach that considers all three. This ensures a balanced view that reflects the true economic value of your business. Whether the business is asset, cash or profit intensive, it’s important to ask: Does the methodology encompass all facets of the business, or is it narrowly focused?

This section can get more complicated than necessary, involving multiples-based approaches, other methods and justifications. Overall it's important to understand the three key approaches, as most valuations will loosely follow the above guidelines. As always, valuations are always unique - as there are always contextual factors that come into play and, therefore, need a methodology to reflect such. To learn more about valuation methods, and how to do them yourself - check out our “business valuations methods” article.

‍

2. Assumptions Held: Sales Forecasts, Market Trends, and Consumer Expectations

Valuations are grounded in assumptions, such as future sales forecasts, market trends, and consumer expectations. The credibility of these assumptions is crucial - they must be backed by robust data and account for a range of scenarios. Consider the questions: 

• What are the expectations of market trends?
• What are the assumptions of consumer behaviours?
• How was the market value derived?
• Are the estimations of these optimistic or conservative?
• What are the expectations of scalability? 
• How was the multiplier calculated? 
• Are the strengths and weaknesses of the business represented? 
• What estimations make-up the sales forecast? 

The more comprehensive and data-backed the assumptions, the more dependable the valuation. Most importantly, assess how figures and values are derived, and question what the assumptions are based on?

‍

3. The Economy: Competition, Market, and Industry Trends

External factors, encompassing the overall economy, competition, and specific market and industry trends, have a profound impact on your company’s value. A valuation that fails to consider these elements effectively will not accurately reflect the business's position involving its industry or its growth potential. Through understanding your competitors, and aligning with broader market dynamics, insights are gained into where your business stands and its potential trajectory. Understanding these markets - both the larger pools and niche bases, is essential to grappling with the value of your goods and services, as well as the risks and opportunities for expansion and scalability.

It's important to assess where this data is derived from, what interpretations and estimations are made - to ensure it accurately reflects the business. This can be tricky to gauge when attempting to break through to a new emerging market, or disrupting an existing one - however it's the justification for these interpretations, backed by vigorous data that hold validity for valuations.

‍

4. Intangible Assets: Agreements, Networks, and Intellectual Property

Intangible assets - such as agreements, strategic partnerships, networks, and intellectual property - are among the most challenging elements to quantify but can be pivotal to your company's value. These assets represent unique advantages that may not be fully captured through traditional valuation methods. Assessing their worth requires careful consideration of the value they bring to the business, including their potential to drive future growth and maintain competitive advantage. 

Whilst intangible assets have made progress in the realms of being represented in accounting, there is still a long way away from the true reflection of its investment. Therefore competence from your valuation advisors is key - gauging with questions such as - are the expenses in the development of your IP considered as R&D? How are your agreements and networks valued? How are key workers, suppliers, contracts or negotiations existent reflected? 

‍

Using the Framework to Evaluate Valuations

Valuations are inherently complex and subject to change as underlying factors evolve. If you receive a valuation that you disagree with, use the above framework to assess the methodologies and assumptions applied. This will allow you to identify any gaps or biases in the valuation and make informed judgments about its validity.

Ultimately, the value of your company is contingent on fluid and dynamic variables - and valuations serve as snapshots in time. Maintaining attuned to the changes in your business and market conditions will help ensure your company is accurately represented. However, overall - the methodologies and assumptions underpinning any valuation are most critical, as a valuation is not only as credible as the data on which it relies, but the justification of the interpretations of such.