Business valuation is often seen as a straightforward equation: high growth and profitability equal high value. However, the reality is far more nuanced. We spent some time combing through recent data from our express valuation product, and it revealed a number of interesting, counterintuitive insights that are worth exploring.

So consider this a quickfire smorgasbord of surprising valuation truths in bite-sized chunks. Let’s dive in!

Growth vs. Value - The stability factor

It’s a common misconception that rapid growth automatically translates to high business value. In fact, our internal data shows that businesses with moderate growth rates often achieve higher valuations compared to those experiencing rapid, yet inconsistent, expansion. For instance, companies with a 25% to 35% growth rate have an average value of $3.5m, whereas those with over 50% growth only reach $1m. This indicates that stability and manageable growth are more attractive to potential buyers, as they imply lower risk and more predictable returns.

Average Value By Growth Expectation

Source: bizval internal data

Rapid growth can be exciting, but it also introduces a high degree of uncertainty. Investors and potential buyers typically prefer businesses that demonstrate consistent financial performance, as this is perceived as a lower risk investment. In contrast, businesses that grow too fast may struggle with cash flow issues, operational inefficiencies, or even market saturation. These factors can dampen long-term prospects and reduce the perceived value of the business.

This doesn’t mean that growth should be avoided – rather, it should be well-planned and sustainable. Developing a growth strategy that balances expansion with strong financial management is key. For example, focusing on organic growth through customer retention and gradual market expansion often proves more valuable than overly aggressive scaling.

In short, creating robust, scalable processes and maintaining consistent financial performance are key to long-term value.

Owner Dependency - A silent value killer

Another critical factor affecting business valuation is owner dependenc. Many SMEs are built around a single individual – often the founder – whose expertise, relationships, or vision are central to operations. However, our data highlights that high owner dependency significantly lowers value. Companies with minimal owner dependency have an average value of $2,237,000 compared to just $161,000 for those where the owner plays a critical role.

Average Value By Owner Dependency

Source: bizval internal data

Why is this the case? Well, from a buyer’s perspective, owner dependency represents a risk. If the owner’s departure would severely disrupt operations, the business becomes a less attractive investment. Buyers want to be confident that the business will thrive regardless of personnel changes. Consequently, reducing owner dependency can significantly boost the attractiveness and value of the business.

Secondly, when a company has a high dependency on the owner, it makes it more difficult to scale the business because of the bottleneck in decision-making. Instead of decentralizing leadership and empowering staff to expand their capabilities, an overly involved owner can hamper growth and slow down progress, especially in the minds of potential buyers.

Business owners can mitigate this risk by investing in leadership development and implementing structured processes that can run without them. Creating a strong management team that can operate independently of the founder ensures continuity and reduces risk. Furthermore, documenting key processes and client relationships makes transitions smoother, maintaining business stability.

To summarize, ensuring that key functions do not solely rest on the shoulders of one individual makes the business more attractive to potential buyers.

Industry Leverage - Surprising leaders

It’s not just growth or management that matters – the industry sector also plays a vital role. Some industries command significantly higher valuations than others. It’s probably not wise to speculate on the many reasons that play a role here, but one clear pattern that comes through is that the industries that have the largest valuations are the ones with the most leverage.

Average Value By Sector

Source: bizval internal data

For example, the IT services industry currently dominates our internal data, with the average valuation coming in at just over $3.3m. This demonstrates how software’s immense scalability provides tremendous leverage to build large businesses efficiently and effectively. On the other side of the coin, property development and mining also show strong valuations ($2.8m and $3.2m respectively), showing that leverage can also be found in capital infrastructure and real assets that create economies of scale and raise the barriers of entry for competitors.

If you then look at some of the lower valued industries, these include various services, retail establishments, education, and restaurants. In each case, these businesses are constrained by the intellectual capacity of their people and the nature of their offerings, thus find it harder to scale their operations and increase their valuations.

This is a simplistic picture, for sure, but the point is that different industries naturally have varying risk profiles and growth potential. It’s incumbent on any business owner to understand these industry trends and find ways to leverage them when positioning your business for valuation. Understanding where your sector stands relative to market expectations allows business owners to strategically highlight their strengths.

Longevity - Experience equals trust

Age can be a significant advantage. Companies that have been around for more than ten years tend to have higher valuations, averaging $1,919,000. In contrast, businesses less than three years old average only $907,000. Longevity suggests stability, established customer relationships, and a proven business model – qualities that buyers value highly.

Average Value By Age

Source: bizval internal data

Older businesses have a track record that demonstrates their ability to weather challenges, build customer loyalty, and maintain consistent performance. This history reassures buyers that the business model is sound and sustainable.

While newer businesses may lack history, they can still build value by focusing on innovation and establishing strong customer relationships early on. Demonstrating year-over-year growth, maintaining financial transparency, and showcasing customer satisfaction can help newer ventures present a compelling value proposition.

Focusing on building long-term customer relationships and demonstrating resilience can boost perceived value. In addition, investing in brand reputation and customer loyalty pays off when it comes time to sell.

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Conclusion

We hope that through this selection of valuation insights you can see that the real value drivers of a business extend far beyond high growth and profitability. Factors such as consistent performance, reduced owner dependency, industry positioning, and business longevity all play crucial roles in maximizing value. And these are just a few of those that matter!

By understanding these dynamics, business owners can make strategic decisions that enhance their company’s worth. If you’re looking to understand your business’s true value or prepare for strategic planning, reach out to bizval today for a comprehensive valuation – we’d love to help you!

Visit us at bizvalglobal.com