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Factors that Matter Most When Evaluating a Company’s Worth
By definition, qualitative characteristics cannot be measured, at least not in a straightforward manner. However, they matter when opting to acquire a firm, and sellers should keep them in mind when setting a price and conditions. Here are four key qualitative aspects to think about and weigh into the worth of a firm, whether you’re seeking to acquire or sell.

One of the most important things to ask about leadership is, “How owner-centric is the business?” In other words, how much does the current owner’s involvement matter to the company’s performance, and how intertwined are the company’s brand and the current owner’s reputation?

A vacation resort, where customers come year after year and effectively pay for a connection with the longstanding hosts, is quite different from a hotel owned by a distant owner and run by on-site employees. When considering the value of a hotel, the owner plays a small role, but when considering a resort, the owner is a key one. To guarantee a seamless transfer of significant connections with customers, suppliers, regulators, and others, it is common for purchase agreements to include a provision requiring the existing owner to stay active in some capacity for a certain time after the sale.

A company’s worth may also rest on the shoulders of its management team. To be successful, a company needs competent leadership and employees. If that’s the case, we need to know whether or not these important people will stick around long enough after the sale to pass on sufficient expertise to the new team.

Buyers of businesses often insist on having an “out” clause in the purchase agreement in case they don’t think key employees will stick around long enough to prevent a decline in the company’s value.

Knowing if a company has a consistent or ephemeral clientele might help when valuing the company. A company catering to a homogeneous market, for instance, may not have to focus too much on shifting demographics. Still, a company near a university may have to regularly rebrand itself to appeal to a new generation of students since the student body undergoes a massive turnover every four years. And vice versa, if your company caters to an elderly demographic, you may often need to replace consumers who pass away.

While changes in clients’ psychographic characteristics should be included in company value, these shifts are notoriously difficult to foresee and measure. Customers’ actions, perspectives, personalities, values, religions, political leanings, and way of life all play a role in shaping their psychographic characteristics. Products from a company whose raw materials are the target of an environmental campaign and run counter to consumers’ “green” ideals, for instance, might become unpopular. When determining a company’s worth, it’s important to take into account the company’s resilience in the face of psychographic upheavals, which may have a disproportionately large impact on niche markets and fad items.

Fourth, rules and regulations vary widely from one industry to the next; for example, pharmaceutical companies operate in a highly regulated environment while other businesses have little to no government control. However, no company is ever really unrestricted. Costly compliance with municipal, state, and federal requirements may reduce a company’s marketability. Impact analysis would be simple if the regulatory landscape were stable. However, the regulatory landscape is in a constant state of flux.

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