Seven Drivers of Valuation

These transitions impact many people, especially the owners and the management teams.  

Valuation is a very critical factor during these transitions because it has to be a number that fairly represents the value of the business for the outgoing owners while providing a solid return for the buyers.  

Andrew J. Sherman just published the Fourth Edition of Mergers & Acquisitions which should be read by anyone who is or could potentially be on either side of a transaction. He laid out 7 Valuation Drivers:

1. Strong Revenue Growth 
2. Significant Market Share or Niche Position
3. Barriers to Entry by Competitors
4. Strong Management Team
5. Strong Stable Cash Flow
6. No Significant Concentrations in Customers, Products, Suppliers or Geographic Markets
7. Low Risk of Technological Obsolescence or Product Substitution

For a contractor, numbers 3 and 7 don’t typically apply. 

Number 4 - Building a strong management team is the leverage point that makes the other factors sustainable in the long-run and, therefore, truly valuable.  

Focus on building your most valuable asset; a strong management team.