21. November 2023

Company valuation in practice: factors influencing value

Company valuation in practice: factors influencing value

In the context of a company valuation, there are a number of factors that can have a significant influence on the valuation of a company. Both intrinsic and extrinsic factors play a decisive role, which in turn depend on the respective position and intention of the valuer. The “true” value or market value of a company only emerges at the end of a negotiation process, when the parties have agreed on a price. The theoretically calculated company value can therefore be a guideline for price negotiations, but does not usually correspond to the purchase price for the company. The following are examples of some of the key factors.

Intrinsic factors

  • 1. financial strength
    How has turnover developed in recent years? What is the EBITDA margin and how has it developed? What is the current gearing ratio? How good is the cash flow generation? What are the growth prospects? Depending on the industry, different financial KPIs can be evaluated to different degrees. Basically, the better the KPIs are, also in comparison to the competition, the higher the company valuation.
  • 2. management
    How good is the quality of the management? How many years of experience does the management have? What is the reputation of the management? An experienced management team that has a proven track record of success and remains with the company gains more trust from investors and can therefore be reflected positively in the valuation.
  • 3. products/technologies
    How good is the product quality? How high is the innovative strength? Are there any disruptive technologies? Are there any patents? Unique products and strong technologies indicate a competitive advantage and can increase the valuation.
  • 4. customers
    How diversified is the customer base? What is the quality of the customers? How long are the average customer relationships? A good and loyal customer base has a strong market position and stable income streams, which has a positive effect on the valuation.
  • 5. suppliers
    How good are the supplier relationships? How much negotiating power do they have? Are the suppliers reliable? How good is the quality of the suppliers and are they subject to regular quality audits? Reliable suppliers can reduce production/procurement costs and increase margins, which in turn has a positive effect on the company’s valuation.

Extrinsic factors

  • 1. regulation
    What is the current political environment? Which regulatory provisions must be complied with? How quickly do you have to react to changes in the law? How well you are prepared for regulatory requirements and how efficiently you can implement them can have an impact on your company valuation.
  • 2. market potential
    What are the current market trends? What are the growth prospects? What are the current market risks? How robust is the market against external factors? Market potential plays a decisive role in company valuation, as it reflects the future potential growth potential of a company.
  • 3. competition
    How many competitors are there? How high are the barriers to entry? How good is your own market position? How much market share do competitors have? The company’s own market position and differentiation from competitors can have an influence on the company valuation; a highly competitive market generally leads to poorer profitability due to lower pricing power and increased marketing expenses.

Company valuation in practice – Our conclusion

A company valuation is influenced by a variety of factors, meaning that the “true” or market value of a company is usually only determined at the end of a negotiation process once the parties have agreed on a price. The theoretically calculated company value only serves as a guideline for price negotiations and does not usually correspond to the final purchase price. Overall, practice shows that a comprehensive and balanced consideration of intrinsic and extrinsic factors is necessary in order to achieve a realistic company valuation. The success of a company and its attractiveness for potential investors therefore depend on a careful evaluation and consideration of these elements.

We are happy to advise you

Marcel Brix

Managing Director | BLOK Management GmbH

Oliver Kolb

Managing Director | BLOK Management GmbH

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