How Risk and Value Drivers Impact Company Value

When valuing a privately held company, several qualitative factors should be considered that will help assess risk and value drivers.  All things equal, the higher the risk factors the lower the company value.  This is especially true if a company is being valued using a market approach and applying multiples.  If the comparable companies are yielding a wide range of multiples then attention should be paid to the company’s individual characteristics that may move the needle to the lower or higher end of the multiple range. 

In Valuation for M&A: Building and Measuring Private Company Value, Chris Mellen and Frank Evens set forth the following (non-exhaustive) factors that would generally tend to increase or decrease a company’s value and multiple selected:

1.       Possess strong brand name or customer loyalty.

2.       Sales concentrated with a few key customers.

3.       Operate in a well-maintained physical plant.

4.       Operate in a small industry with a limited customer base.

5.       Generate a high sustainable net cash flow to shareholders.

6.       Have compiled or reviewed rather than audited financial statements.

7.       Possess competitive advantages, such as technology, location or an exclusive product line. 

8.       Operate with deficient working capital and generally limited financial capacity.

9.       Generally favorable future economic and industry conditions.

10.   Operate with limited management on whom the company is heavily dependent. 

11.   Sell a diverse mix of products to customers located in broad geographic markets.

12.   Sell commodity-type products that possess little differentiation from competitors.

13.   Operate in large, high growth industry.

14.   Substantial excess capacity exists in the industry.

15.   High barriers in industry impede entry by new competitors.

16.   Continual threat posed by substitute products and technological obsolescence. 

17.   Possess strong position in niche industry.

18.   Sell products through brokers, creating limited knowledge of or contact with product end users. 

19.   Are either the most efficient low-cost producer or high-quality producer or both.

20.   Possess history of litigation with customers, suppliers and employees. 

Do any of these factors sound familiar? How do you think these factors would impact a company’s value?