A business valuation considers industry trends and how well the company is prepared for them.
Market Growth: A growing industry positively impacts the valuation of businesses operating within it. This growth suggests the potential for higher future revenues and profits. A great example today is data security and privacy. We all deal with the issues that surround this growing issue.
Technology Advancements: Industries embracing technological innovations tend to command higher valuations. Companies leading in technological innovation are often valued` more due to their competitive advantage. Artificial intelligence is enhancing (and changing) almost every industry.
Regulatory Changes: Changes in industry regulations can positively and negatively affect business valuation. Companies that adapt well to these changes may see an increase in value. Others see a new niche as regulation changes.
Consumer Preference: Shifting consumer preferences can significantly affect the demand for products or services. Businesses aligning with these preferences tend to have higher valuations. The fashion industry is a perfect case. Everything from clothes to cars to eyeglasses depends on current consumer tastes.
Competitive Landscape: The level of competition within an industry plays a role in business valuation. Companies with a strong market position and competitive advantage tend to have higher valuations. Smaller businesses fill niches that larger companies can’t or will not. Larger competitors often cannot provide customers with small quantities of an item. They cannot invest in designing a component to a customer’s specification unless the resultant product has a broad reach.
Global Economic Conditions: Overall economic conditions, both globally and locally, can impact business valuations. Economic downturns may lead to lower valuations, while periods of growth can have the opposite effect. Some industries are counter-cyclical.
Environmental, Social, and Governance (ESG) Factors: Increasing importance placed on ESG considerations can influence business valuation. Companies with strong ESG practices are often more attractive to investors. Sustainability is a hot topic that companies are currently navigating. European companies already must report on their sustainability efforts. Are American companies soon to follow?
Supply Chain Resilience: Recent events, like the COVID-19 pandemic, have highlighted the importance of supply chain resilience. Companies with robust supply chains are valued higher due to reduced operational risks. The challenge here is ordering well in advance and stocking higher levels of inventory. Customers who pay their bills on time are well remembered when vendor supplies are short.
Mergers and Acquisitions (M&A) Activity: The level of M&A activity within an industry can impact valuations. High M&A activity can drive up valuations as companies become potential acquisition targets. Keep in mind, though, these acquisitions often are not a good indicator of value for a typical valuation for a regulatory filing, like an estate tax return or an annual ESOP filing. Each acquirer has a specific agenda when buying a company, ranging from entering a new market to synergistic sales. These buyers are often willing to pay more because of a specific agenda. Valuations for regulatory purposes cannot rely on unknown agendas. These valuations must assume (with exception) that the buyer will run the company similarly to the current owner.
Repeating Revenue Streams: Industries shifting towards subscription-based models, service contracts or significant repeatable revenues often receive higher valuations. Wouldn’t you pay more for certainty?
Adapting strategies to align with these trends can maximize a company’s valuation. Additionally, a comprehensive business valuation considers various financial, operational, and market factors to provide a holistic assessment of a company’s worth.