Non-financial risk factors are quantitative measures that cannot be expressed in monetary units which are critical indicators of a company’s health and performance. The non-financial characteristics of a business will generally have a significant impact on the value of that business. Non-financial factors such as employee matters, the role of shareholders, supplier agreements and internal processes often impact on the risk profile of a business enterprise, which directly impacts on valuation. Below I provide some additional detail on the non-financial factors mentioned above.
All business owners understand that good employees are vital to the success of their business. Quality employees take responsibility, build strong relationships with staff and suppliers and inspire other staff members to put in their best efforts at work. Many business owners have also experienced the damage and havoc that can be caused by one or two rogue staff members. Based on this, the quality and reliability of a business’ employees will have a direct impact on the value of a business.
Role of Shareholders
How integral are the Directors and Shareholders of a business to that business’ success? ‘Owner-operator’ businesses where one or two working proprietors hold a significant amount of non-transferable knowledge are generally difficult to sell in the marketplace, meaning their values are normally discounted. On the other hand, businesses with a strong management structure in place, and proven systems and procedures are often easier to transact in the marketplace and generally attract a premium among business buyers demonstrating a positive impact to business values.
The strength or weakness of a business’ supplier base will greatly impact on the business’ value. Does the business have the freedom to choose from a multitude of similar suppliers with similar products or services, or are they tied to one or two key suppliers? When a business is tied to one or two key suppliers, with limited opportunity to source goods or services elsewhere an assessment of those supplier’s stability, in conjunction with an assessment of risks contained within supply agreements is needed in order to determine the impact on the business’ value.
Well developed and managed internal processes are essential to the successful operation and long-term profitability of any business. Within most successful businesses, there exist clear guidelines on cash flow management, job costing, profit monitoring systems with a strong overall leadership presence from management. Having well developed and managed internal processes will have a direct impact on a business’ value
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Analysing the non-financial factors of a business is an imperative part of the business valuation process. It’s an area we’re very familiar with, hence if you require any assistance for an acquisition that you are undertaking feel free to contact us for a free confidential consultation with one of our team.