Key Factors that Influence the Valuation of a Company

The value of the company is in the eye of beholder. Investors should carefully evaluate information they can obtain about the company in order to develop expectation of current and future value.

The value of a company is determined by both internal factors, which are subject to the control of management, and external factors, which are out of the control of a company. The reason for, sometimes, wide range in value estimates by various investors is the knowledge about the key value drivers.

HERE ARE KEY FACTORS THAT INFLUENCE THE VALUATION:

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Investors should evaluate company’s value drivers by com- paring them to industry peers. For example, one can start with historical price-to-EBITDA multiples as follows:

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Why, then, are there such huge differences in value and multiples paid? Profitability, Risk and Growth drive the differences.

PROFITABILITY. All else being equal, more profitable companies are more attractive to buyers and often command higher multiples.

GROWTH. All else being equal, companies that demonstrate stronger growth trends are more attractive to buyers and often command higher multiples. One has to be careful. The growth needs to be profitable, i.e. additional revenue needs to be generating similar level of profit. Notice what happened to Amazon when it announced higher revenue but even lower than expected profit. The stock price dropped over 10%.

RISK. The higher the risk the lower the multiples and thus the value. Here are some typical factors that contribute to risk for a company:

• Market analysis – barriers to entry? Positioning/ differentiation? Market share?

• Management – depth? Age and amount of experience in industry and company? Succession plan? Key man insurance?

• Customers – concentration? Is the revenue recurring or non-recurring from the existing customers?

• Vendors – concentration? Contract terms?

• Lack of product, market, industry, or geographic diversification

• Financial position / strength of balance sheet – What is current capitalization (debt and equity)? What is Net Working Capital requirement?

• IP/Legal risks – Is IP patent protected? Are trade-marks registered? Are there any existing or pending lawsuits? Any regulatory exposure?

• Infrastructure – Are there any required or deferred capital expenditures? Quality of IT infrastructure?

• Internal controls – are there third party audited or review financial statements? What is the spending approval process?

Once the above data is gather for the target company, investors can develop their own initial valuation range. As new information becomes available thru due diligence process the range may change or narrow.

The above process can also be used to project future value. The chart below shows current and potential future value for a sample company. In this case, the investors are counting on the company to increase profitability and reduce certain risks. These two changes would justify increasing the multiple for the business (based on transaction for similar companies). Higher profitability increases the value of the business as well.

when it announced higher revenue but even lower than ex- pected profit. The stock price dropped over 10%. RISK. The higher the risk the lower the multiples and thus the value. Here are some typical factors that contribute to risk for a company: • Market analysis – barriers to entry? Positioning/ differentiation? Market share? • Management – depth? Age and amount of experi- ence in industry and company? Succession plan? Key man insurance? • Customers – concentration? Is the revenue recur- ring or non-recurring from the existing customers? • Vendors – concentration? Contract terms? • Lack of product, market, industry, or geographic diversification • Financial position / strength of balance sheet – What is current capitalization (debt and equity)? What is Net Working Capital requirement? • IP/Legal risks – Is IP patent protected? Are trade- marks registered? Are there any existing or pend- ing lawsuits? Any regulatory exposure? • Infrastructure–Arethereanyrequiredordeferred capital expenditures? Quality of IT infrastructure? • Internal controls – are there third party audited or review financial statements? What is the spending approval process? Once the above data is gather for the target company, investors can develop their own initial valuation range. As new informa- tion becomes available thru due diligence process the range may change or narrow. The above process can also be used to project future value. The chart below shows current and potential future value for a sample company. In this case, the investors are counting on the company to increase profitability and reduce certain risks. These two changes would justify increasing the multiple for the business (based on transaction for similar companies). Higher profitability increases the value of the business as well.

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John Reighard, Partner & EVP

John Reighard is a Partner at Angel Investors Network, where he leverages his expertise in business development, networking, and investor relations to help entrepreneurs secure funding and scale their businesses. With a passion for connecting people and ideas, John plays a pivotal role in fostering strategic partnerships and guiding business owners toward sustainable success. In addition to his work with Angel Investors Network, he also owns and operates two other small businesses.

 

A Connector and Networking Extraordinaire, Business Coach/Consultant, and Inspirational Speaker, John is deeply committed to helping individuals and businesses achieve meaningful results. His mission is to empower entrepreneurs and leaders to create lasting impact through strategic growth, financial acumen, and powerful relationship-building.

 

John has trained with, been mentored by, and provided consulting services to some of the world’s top thought leaders in personal development and business transformation, including Jack Canfield (America’s #1 Success Coach and Founder of Chicken Soup for the Soul), Stephen Covey, T. Harv Eker, Bob Proctor, Blair Singer, Robert Kiyosaki, Neil Rackham, Marcia Wieder, and Roger (Bud) Seith. These experiences have shaped his ability to guide clients through personal and professional growth, helping them unlock their full potential.

 

Before joining Angel Investors Network, John took a sabbatical in 2002, living with his family in Norway, Portugal, and France—an enriching experience that followed 15 award-winning years in Silicon Valley. During his time in the tech industry, he worked for leading companies such as Lucent Technologies, Exodus Communications, Octel Communications, and Brady Corporation.

Meet Jeff Barnes

Jeff Barnes is a former US Navy Nuclear power plant operator on a Submarine, Navy diver, risk management director, technology enthusiast, business growth expert, advisor and management consultant. Mr. Barnes sits on the boards of startup companies, runs a venture fund, supports non-profits supporting military vets, and spends most of his time helping CEOs and founders of growing companies automate, systemize, and scale to 8 and 9-figure valuations.

 

With over 20 years of technology, systems, operations, and marketing experience, Mr. Barnes has advised over 1,000 companies, invested tens of millions in advertising campaigns, and helped companies generate over $1 billion in investment capital.

 

As the chairman of Angel Investors Network and founder of Digital Evolution Marketing Group, Mr. Barnes has worked with founders, entrepreneurs, and CEOs around the world to accelerate the growth of their businesses and achieve substantial exits. He’s a father, husband, veteran, business owner, advisor, and mentor, and his true passion in life his helping others achieve success, freedom, and autonomy in theirs.