Valuation & Business Concentrations
Webster’s dictionary defines “concentration” as the act or process of concentrating, especially the fixing of close, undivided attention. In business valuation context, it is assessing a company’s risk profile and financial outlook. The presence of substantial concentrations (i.e., risks) frequently results in a lower value, than what otherwise might be expected. Concentrations, from a conceptual point of view, are external and/or internal.
External examples may be:
- A single or few customers for all of or a major portion of sales generated by the company.
- Customers representing a narrow industry niche.
- Sales limited to a restricted geographical territory.
- A single product line or service offered for a major portion of sales generated.
- A single sole source supplier.
- Limited pool of specialized skilled personnel.
Internal examples may be:
- Owner’s ability or desire not to give up full control of daily operations.
- Dependency on a key manager or single employee.
- Operations depending on a single asset (i.e., piece of equipment).
- Frequent turnover of employees.
The above examples of concentrations impact a company’s value. Many of the aforementioned imply limits on sales and profitability growth. As we discussed in our January newsletter, the three key factors in business valuation are: (i) profitability; (i) growth; and (iii) risk. The greater the perceived risk of an investment, an investor would demand a lower value (i.e., purchase price).
How can American Business Appraisers Help?
Business valuations require a significant amount of careful consideration and judgment. Our experienced staff recognizes and quantifies a business’ risk factors and value drivers. Call us to discuss any specific valuation needs. Every individual situation is different and not everyone requires our appraisal services and sometimes just talking with one of our appraisers is all that may be necessary. With our initial consultation, there is no cost or obligation to you. We promise you two things; first, to invest a reasonable amount of time to gain an understanding of your specific requirements, and second, our communication will be kept confidential.