Showing posts with label financial measures. Show all posts
Showing posts with label financial measures. Show all posts

Friday 23 April 2010

How much should you pay for a business? Valuing a company (5)

Balanced Scoreboard

As already mentioned, there are often non-financial considerations to valuing a company. A scoreboard that balances financial and non-financial measures can be used to help manage a company and also help us value one. Non-financial measures might include:
  • Health, safety and environment - many companies have policies relating to these factors and would seek an acquisition that might enhance their position in these areas. This could include accident rates, environmental impact and energy usage.
  • Production measures - these will vary from one industry to another but might include production efficiencies, output per worker, waste levels and how up to date the production processes are.
  • Intellectual property - the potential value of patents, trademarks and brands.
  • Employees - the skills, motivation, satisfaction levels, productivity and loyalty of the people who work in the company.
  • Marketing - geographical coverage, customer satisfaction and loyalty, market share and potential fit with existing activities have a value that can be different for different purchasers. The outlook for future growth might lead to an expectation of a better performance in the future, as could the rate of product and process innovation, and percentage of sales from new products.
  • Strategic fit - difficult to quantify, and used to justify high acquisition costs! Companies will also claim to be able to gain synergies and cost savings through merging the two organisations.

How much should you pay for a business? Valuing a company (1)

How should we put a value on what a company is worth? 

There is only one accurate answer to this question - whatever someone is prepared to pay! In evaluating 'worth' we must consider a number of alternatives.

Though we often look at financial measures, we must never forget the non-financial measures too. These factors can far outweigh any financial appraisal, as it is only based on a company's past track record rather than its future potential.

When putting a value on a company, always consider more than one measure, to allow a 'reality check' on the methods being used.


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Valuing a company (1)