Evaluating business Factors From the viewpoint of the investor or the valuation consultant

Evaluating a business’ strength and competitive position is a complex task and as such there are many factors that influence the multiple of a business. 

Whilst there is no definitive list of variables there are certainly three key focus areas which are the 

1- Transferability, 

2- Sustainability,

3- Scalability of revenue. 

Any operational or market factor that directly or indirectly impacts these core drivers will influence the multiple to attach to the business. 

Below are some of the most common valuation drivers to think about when appraising E-businesses for acquisition.

* FINANCIALS 

? How old is the business? 

? How has gross and net income been trending for the last 1-3 years? The last few months? 

? Can a new owner replicate the cost structure? Can they make any savings? 

? Are there any anomalies in the financial history of the business? If so, are they explained? 

? Can all of the revenue streams be transferred to a new owner? 

? How stable is the earning power e.g. are CPMs in this niche on the decline/hard to replace? 

? Is the owner an influence on the earnings power (i.e. owner specific earning relationships)?

OPERATIONS 

? How much of the owner’s time is required to run the business? 

? What are the owner’s responsibilities? Are there high technical requirements? 

? What technical knowledge is required to run or manage the business? 

? Are their employees/contractors in the business and how are they managed?

TRAFFIC 

? What percentage of traffic comes from search? (i.e. what percentage is potentially at risk from search engine algorithm changes) 

? How secure are the search rankings? What is the mix of short and long-tail?

How has traffic between trending for the last year? The last few months? 

? Has the site been affected by any Google algorithm changes or manual penalties? 

? What is the industry trend (see Google Trends)? 

? Where does the referral traffic come from? Is it sustainable? 

NICHE 

? How competitive is the niche? 

? What are the barriers to entry? 

? Is the niche growing? 

? What are the recent trends and developments in the niche? ? What expansion options are available?

CUSTOMER BASE 

? Where does the business get customers from? 

? How much do customers cost to acquire?

 If subscription, what is the customer lifetime value and churn rate? 

? If one-time, how active is the customer base? Are they reordering? 

? Is it possible to remarket to the existing customers? Is there a mailing list

OTHER 

? Are there physical assets or specific locational responsibilities with the business? 

? Are there any licensing requirements in order to run the business? 

? Does it infringe on any trademarks?

With a sense of the relevant valuation drivers, 

an investor can be much clearer about what to look for when appraising a business and what to seek information on from the founder. 

A good consultant will ask the right questions of the founder and recommend startups before they even come to market. 

finally, Factors to Consider When Evaluating Successful Business Ideas

Determine the Market Size and the Demand

Tap on Relationships in Business

Ability to Manage Funds for Cash Flow

Determine the Management Skillsets Needed

Business Passion and Persistence

Start Weighing Your Options!

Personal & External Factors that Evaluate a business opportunity.

Factors to consider when evaluating a business opportunity

a) Personal consideration

-These are the abilities and expectations of an entrepreneur. They include the following;

* Objectives

-The entrepreneur should evaluate the business idea to find out whether it is in line with his/her objectives.

* Skills

-Where a business requires certain specialized skills and those skills are lacking the idea may be dropped.

* Commitments-Where the business is likely to interfere with the entrepreneurs' other commitments it may fail.

* Interest

-It is necessary to check whether the intended business will interest the entrepreneur or not. If the entrepreneur will not enjoy running the business, the idea should be dropped.

b) Business consideration

-These are external factors that are likely to affect the operations of the business and they include:

1-Availability of the market for the product

-An entrepreneur should assess the availability of customers before starting a business. Customers exist where there is a gap/nich in the market.

2-Technology

-The business should be evaluated in terms of whether there is an appropriate technology that can be used in production. Factors to be looked into include;

a. -Appropriateness of the technology

b. -The cost of the technology

c. -The possibility of the business suffering in case the technology becomes outdated/obsolete.

3-Availability of raw materials and other resources

The raw materials and resources required should be within

the reach and affordable to the entrepreneur.

4-Government policy

-An entrepreneur should consider the requirements of the government before starting a business e.g. the government may require certain businesses to be located in certain areas only.

5-Amount of capital required

-The capital required to run and maintain the business should be considered i.e the source of capital.

6-Profitability of the business

-Within a certain duration of time.

7-Level of competition

-This will help determine whether the business will survive or not.

With answers to the right questions, one can begin to devise a multiple for the business.