Business Valuation: A List of Factors to Consider

Jacob Orosz Portrait
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

It’s obvious that the more profitable your business is, the more valuable it is. However, there are many other factors that can affect the value of your business.

Risk vs. Return

The primary reason a buyer may be willing to pay a premium price for your business centers on their perception of risk and return. Any factor that reduces the risk associated with owning your business or that enhances the prospect that your business will grow significantly will improve its value. Buyers will compare the risk and return of buying your business with the risk and return involved in alternative investment opportunities such as real estate and stocks.

Review the List Below to See Where You Can Improve

We compiled a comprehensive list of factors that can affect the value of your business. It’s unlikely every consideration below will be relevant to your situation, but reviewing these items should help you see where your business is strongest and where you can make improvements to maximize its value. Understanding these factors will help you understand the universe of variables that can come into play.

The Company

  • What are the growth prospects for the company?
  • What are the risk factors?
  • How long has the business been in operation?
  • How scalable is the business?

The Industry

  • What are the barriers to entry in your industry?
  • How is technology affecting the company and its industry?
  • Have there been any recent acquisitions in your industry?
  • What is the nature of competition in the industry: saturated, consolidated, fragmented, or small mom-and-pop?
  • Where does the company fit in the industry in terms of profitability?
  • How do average transaction values for your business relate to your industry?
  • How do the margins in the business compare with its peers in the industry?
  • Is the industry seasonal, cyclical, or countercyclical?


  • How would you describe the competition in your industry? Limited? Strong?
  • What is the threat of potential future direct or indirect competition?
  • Do barriers to entry pose a threat?
  • What are the restrictions to entry?
  • Are there any protections from excessive competition?
  • Do you have a sustainable competitive advantage?
  • Do you have a competitive advantage that is difficult to copy or imitate?

Products & Services

  • Can prices be increased? (Price increases fall straight to the bottom line.)
  • Do you have any products in development that can add significant value to the business?
  • Does your business deal in highly specialized products or services (i.e., no commodities)?
  • Is the overall outlook strong for the industry or your specific product or service?
  • Does your business produce a product or service that is in high demand?
  • Is your business in a position to create additional related products or service lines?
  • Does your business own any intellectual property (patents, trademarks, trade secrets, etc.)?
  • Is your technology proprietary?


  • Can the marketing methods be automated and reproduced, or has the business depended too much on your personal selling, networking, or marketing efforts?


  • Are there any personal relationships between you and your customers that would cause them to leave if you no longer owned the business?
  • Does the business require contracts with customers?
  • Is the customer concentration limited (i.e., no more than 10% of revenue generated from one customer)?
  • Do you have in place strong customer contracts?
  • Does your business have strong relationships with customers?
  • Is yours a robust, referral-based business?
  • Is the customer base strong, stable, and diversified?
  • Does your business cater to a strong, repeat customer base?
  • Do your customers exhibit a strong ability and willingness to pay?
  • What is the customer retention rate?
  • Are there customer concentration issues?
  • How diverse is the customer base?


  • If applicable, is your business located in a desirable location?
  • Do you employ strong business controls?
  • Are your business’s operations, policies, and processes thoroughly documented?
  • Any regulatory threats or potential litigation on the horizon?
  • Is regulation minimal or stable (unless regulation produces a healthy barrier to entry)?
  • Does your business have a long history (the longer, the better)?
  • Are there any limited or ongoing warranty obligations in place?
  • Is your business model scalable?
  • If a physical facility is central to your business, is it expandable?
  • Is the reason for your sale non-urgent?

Location & Facilities

  • Is the real estate owned or leased?
  • If the real estate is owned, is the business paying a market rate for the rent?
  • If the real estate is leased, is your lease above or below market rate? Is the property available for sale?
  • Can the business be relocated to another geographic market?
  • Is any equipment leased? If so, is it a capital or operating lease?


  • Do you have a trained and experienced management team in place?
  • Do you have non-disclosure or non-solicitation agreements in place?
  • Are key employees under contract?
  • Are non-solicitation or non-compete agreements in place with key employees?
  • Do you have any non-working family members on the payroll?
  • Are you dependent on any specific employees?
  • Are your key employees willing to stay after the sale?
  • How many hours per week are the owners working?
  • Are the owners receiving a salary?
  • Are family members working in the business without compensation?
  • How strong is the management team?
  • Does the management team have a solid track record of achieving results?
  • What is the annual employee turnover rate?
  • Are wages above or below industry averages?


  • Is your equipment up to date?
  • Is any deferred maintenance scheduled?
  • How much of your equipment is leased?


  • How much working capital is required to operate the company?
  • How much do you spend per year on capital improvements? (Sophisticated buyers subtract an amount for working capital, which includes a deduction for annual investment in capital equipment.)
  • How accurate are your financial and accounting records?
  • Is the business using LIFO, FIFO, or some other form of inventory accounting method? If so, has this dramatically affected the earnings?
  • Is any inventory obsolete? If so, has it already been written off the books?
  • Are the financials prepared on a cash or accrual basis? If accrual basis, are the accruals being correctly done?
  • Are the revenues steady, increasing, or decreasing?
  • Does the business have any recurring revenue?
  • Has the business loosened terms to boost revenue in the short term?
  • Are gross profit margins holding steady, increasing, or decreasing?
  • Are the accounts receivable healthy?
  • How does the company’s financial performance compare with its peers?
  • Are prospects for revenue growth positive?
  • What are your minimum annual capital expenditures?
  • What are your minimum inventory requirements?
  • Is the cash-flow cycle short?
  • Are accounts receivable minimal or healthy?
  • Are gross margins strong?
  • Do your tax returns match your financial statements?
  • Do you have any unreported income (e.g., unreported cash sales)?
  • Are your financial statements clear and accurate?
  • Do you enjoy favorable pricing (i.e., your business does not compete on price)?
  • Is income recurring (Note: recurring differs from “repeat”)?
  • Is the national, regional, or local economy in which you do business considered strong?
  • Do you have strong accounting controls in place?


  • Is there any pending litigation?
  • Does the company own any valuable intellectual property?
  • Does the business have any trade secrets?
  • Does the business carry adequate insurance policies?

The Sale