Factors Affecting the Value of a Business

Lease & Occupancy Cost

In the cases of businesses operating on a lease, the lease terms are key to affecting the contribution of value to the business.  For retail business that are not footloose, a long term is key to positive value.  For example, with a coin laundry, the lease needs to be typically, 20 years or more in length.  Long term leases are important with most retail businesses.  In the case of a retail business owner with little time remaining on the current lease, it is a double edged sword to attempt to sell.

If the market is hot and commercial vacancies are low, the buyer is facing a rent increase which surely reduces the value of the business for the buyer.  On the other hand, if there is a short or expiring lease in a soft market with high vacancies, this can be good for a buyer as they can negotiate a new long term lease at a favorable low rate.  This can make a business more attractive to a buyer and possibly inflate the value a little bit.  Since high vacancies are typically only in soft markets, buyer demand is usually low, so prices and this value usually are depressed in general.

In industrial businesses long term leases are also important if the location is strategic or the build out is expensive and complicated to replace.  Short term leases are only a benefit in Industrial businesses if the business needs change the amount space it needs to occupy or if the market is soft and lease rates are down.  If a business owns the Real Estate it occupies, the major factors in play are the operating costs of the property and the equity in the property.

In Summary: Good lease terms can increase the value of your business.  Renegotiate your lease terms to improve the value of your business.

Customer Mix & Type

Customers, and the amount and type of them are also another key factor in affecting the value.  The fewer the customers, the more streamlined the business is, which makes for less customer headaches.  Of course, what is good for the goose, isn’t necessarily good for the gander.  A buyer, especially one without operational synergies is going to be concerned about putting a lot of eggs in one basket, so having a concentrated customer base adversely affects the value of a business in most situations.  Also, having customers that require more hand holding or processing time can also be a turn off to buyers, so this can have also have an adverse affect on the value of a business.

If you have a concentrated customer base, it is an asset if you have them on contract with your business.  In lieu of a contract, if your customers are locked into due to proprietary competitive factors, then this is also a positive as the risk of these customers leaving is reduced.

In Summary: A balanced customer base with a long standing history with the business is an asset that will definitely positively impact the value.

Operations/HR/Employees

The operations staff and employee turnover are another critical factor in the value of a business.  Starting at the top, if the owner(s) is/are doing almost all of the critical work tasks then the value is adversely affected.  If on the other hand, the owner(s) are simply managing the operation and staff, then it is more a ‘turn key’ operation and the business has more value to outside investors.  Thus, a strong and well organized staff is a key for business owners to focus on developing for their business and  personal well being.   Wearing too many hats in a business has worn many a business owner down.  This is an all too common situation we come across, seeing our clients’ health deteriorate before our eyes as we have known them over the years.

In Summary: Set up your business to operate seamlessly without your immediate presence.  This is a very attractive factor for buyers.

Industry Outlook

The industry outlook for the business is also a key to the value of a business.  For example, many businesses are facing obsolescence as time passes, such as print shops, independent book stores and periodicals delivery businesses with the advent of content delivery via the internet.  With a bleak long term outlook, the business value can often be extrapolated to zero, and in those cases, the owners have two choices, ride it out until they are ready to retire and close the business at retirement or sell now and get what little they can get.  Business is in growth industries are subject to premium prices, as ROIs can be based on future profit and potentials.  Growth industry businesses are tricky to price as they are based on everybody’s best guess.

For More information on how Just Elementary, Inc, can help you with Business Valuation and Advanced Exit Strategy planning contact our client care manager, Sonia Chhabra, at (888) 926-9193 or email cs@justelementary.com