Factors affecting the valuation of your online business – Times of India

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The author is the Partner & Co-Founder at Kyzen Partners.
It takes entrepreneurial zeal, vision, and leadership to start, establish and grow your business. Wherever you are in your business lifecycle, it is important to be cognizant of the value of your business. Determining business valuation is essential for various reasons – whether you are looking to sell out your business or investors are approaching you to buy your business.
Determining the value of any business isvery subjective and is dependent on much more than just the financials. 
It is aptly said “Valuation is an art, not a science”. This saying is also often quoted by veteran investors also firmly swears by it.
There are several factors commonly used by investors to determine the worth of an online business.
Here are the 6 key factors that affect the valuation of your online business:

1) Revenue Trend
Robust revenue generation and sustainable growth are the fundamental & most significant factors affecting the valuation. It reflects that your business is well established and demonstrates that it can earn a thriving stream of revenues built on the back of a strong business, thus earning a premium and enjoying a high net worth.
A business having steady revenue but no growth in earnings can pull down the business value from the buyers’ view point. Growth is Paramount!
2) Profitability
Running a business is all about making sales and returning profits. However, it requires diligence and skillful management to sustain the profits. 
A business having higher profitability margins (Gross margins, EBITDA margins, and Net profit margins) demonstrates more favorable attributes in terms of value generation. 
Achieving profitability and sustaining the growth of the profits over the years is an indicator of a successful business. Thus, such an enterprise is highly rewarded and commands a higher valuation among its peer group. 

3) Industry
There are a few macro level determinants such as the size of the industry, competitive landscape, and barrier to new entrants, which an investor examines thoroughly while evaluating any brand. 
Easier regulations and sizeable barriers to entry work in the favor of the brand owners and help them command a premium while negotiating the valuation. On the other hand, stricter regulations and lower barriers to entry impact the value of your business.
 
4) Team
There’s a golden saying Teamwork makes the dream work”, which is indeed accurate in all aspects. 
Leadership plays a vital role in the course of any business and is often a differentiating factor in its success. However, the point to be noted here is that leadership should always follow a de-centralized approach rather than the business being a one-man show. Roles and responsibilities well split between a proficient management team results in a cohesive and smooth functioning of any business.
If the business is entirely dependent on the role of a certain person, it entails a business risk known as “key person risk”. Such a business is more likely to encounter challenges in the absence of that key person. 
On the contrary, a company with diverse and proficient team tends to eliminate such risks. Investors tend to lean towards businesses that have a stronger team in place with limited dependency on one person.
5) Competitive Advantage
“In business, I look for economic castles protected by unbreachable moats”.
The above quote is one of the most famous quotes of Warren Buffet. He is a staunch supporter of businesses that demonstrate economic moat i.e., the ability to maintain a competitive edge and hence chalking up the market share. 
The uniqueness of the product, brand preference, low cost, and an efficient supply chain are some of the distinctive factors that contribute to a successful moat. There is no denying the fact that having such an advantage positions your business to be protected from the onslaught of competitors entering your niche and hence aids in its sustainable growth. Investors are keen to take this advantage and are willing to pay a premium for the same.

6) Brand Value
In this era of social media, it is a well-established fact that reputation is the key to your brand. Such is the power of reputation in the information age that it can either make or break a brand. 
It is well stated that “If social media is a part of your business strategy, it’s important to make sure it’s working for and not against you”. A brand that enjoys a great brand equity among its social audience& customer base is a valuable business asset. Such a reputation helps in establishing higher brand recall & loyal consumer base which allows the brand to stay ahead of its competitors and command a premium for its products/services.
Management guru Tom Peters has expertly put, “In an increasingly crowded marketplace, fools will compete on price. Winners will find a way to create lasting value in the customer’s mind.”
Hence, a business owner’s prime focus should be to build positive brand equity to create a strong brand recall among its target audience. Providing good customer experience at every little step brings in brand loyal consumers and assures repeat purchases. 
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Views expressed above are the author’s own.
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