Business Valuation Blog | Understanding Buying / Selling a Company

The Exit Sign: Using the lessons of business appraisal to identify if your ability to compete is waning

Posted by Business Valuation Specialists LLC on Jul 31, 2015 6:30:00 AM

business_appraisal

The level of diligence and commitment required to develop a successful company cannot be easily quantified. Building a stable operation is a challenge. Driving that operational success into financial success is all the more of a struggle as market conditions and growing competition at home and abroad make profitability often seem like a mythical white whale. Because of this, nothing can be more important for a company than recognizing when their ability to compete in the market is declining and how this will affect the future company valuation.

Business valuations can be executed using different methods but each of these have the selfsame goal of critically assessing the strengths of a business, whether that assessment be on a relative of absolute basis. An income based approach uses hard values within a company to determine expected profitability and extrapolate an absolute value. A market approach to business appraisals focuses looks at comparable businesses and what they have sold for in the market. Using business appraisals, as well as the analytical approach intrinsic to valuation, business owners can identify a company’s weaknesses in a competitive environment and even determine whether an exit sign is hanging over the door.

Branding

The value of branding is increasingly important for attracting and retaining customers. Operating in a sector where a company’s primary competitors have large annual budgets for growing and maintaining a brand identity can be challenging for smaller businesses. If a business valuation shows a lack of branding as a weakness and there is an insufficient budget, expertise, or will to build one, it may prove the deciding factor in determining whether or not to exit the space.  

Proprietary Assets

Business owners should ask themselves what service, process, technology, intellectual property, or product do they have that cannot be easily duplicated. Replicability is a weak point that many larger business will exploit. These days, small start-ups can be as threatening as large corporations with fluid business models and young talent with an intrinsic proficiency with leverageable technologies. In this environment, the best security is in proprietary assets. A competent business valuation will assess the strength of these within a company and a lacking in this area could indicate an impending end to competitiveness in the market.

Differentiation

Many businesses have no reliance on branding or advertising in the tradition sense. Others turn a profit by capitalizing on the demand for particular need and have no need for proprietary assets. In truth, even companies for which these are important can survive and succeed in an environment of decreasing competitiveness and they do this through differentiation. Susceptibility to market dynamics is a reality of the business world, no matter the sector or industry; however, this risk can be mitigated through intelligent diversification. A business lacking competitive advantage can focus on acquiring specialized customer knowledge, capitalizing on price advantages through overhead reduction, securing an advantageous location, or any of a number of intangible strengths that fuel the staying power of a firm.

Determining the appropriate moment for a company exit can be as challenging as the forming of the company itself; however, company valuations provide powerful insight into the relative and absolute strength of a firm and can guide a small business owner in identifying the best, and most profitable, course of action. 

Topics: Business Valuation, business appraisal