What key factors do you use in valuing your company? Any valuation process that includes combining the valuations arrived at by using the “hard” empirical data represented by the company’s current financials with the evaluation of the company’s future earnings projections. Final valuation is determined by combining these elements with the qualitative assessment of the company’s business growth prospects.

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VALUING YOUR COMPANY
                                                                
What key factors do you use in valuing your company?  Any valuation process that includes combining the valuations arrived at by using the “hard” empirical data represented by the company’s current financials with the evaluation of the company’s future earnings projections.  Final valuation is determined by combining these elements with the qualitative assessment of the company’s business growth prospects.

An important factor in the financial valuation comes from comparing the company’s key financial and performance ratios to its industry segment’s representative statistic, and using this information “benchmark” the company’s financial performance.  The combination of these methods provides a composite valuation.  from this “range” of possible valuations. It is all based upon a qualitative analysis judgment of the pertinent information.

Another unique approach to the business valuation process has been developed.  This approach includes a qualitative assessment of the important success factors, which, based upon its experience within most of the high technology companies, must usually be present in order for a company to grow and thrive in this increasingly competitive environment.

Qualitative Success Factors Assessment

My knowledge of the high technology industry has resulted in identifying a number of “success factors” whose presence and degree of strength are found to be indicators of success among software and information technology companies.

Some of the more important factors consistently found in “successful” companies include:

•Distribution Strength -A company’s market penetration, as a measure of share within its segment, is indicated by its degree of distribution acceptance and widespread strength versus its competitors within key sales distribution channels.

•Installed Products vs.  Competition -Another measure of market strength is the company’s installed products of users versus competition.  The degree of market acceptance, and willingness of product users to stay with the company’s delivered technology is also a key success factor.

•Market Share -This is the ability of the company to gain share in its particular segment or niche.  Higher share companies tend to be more successful.

•Product Technical Superiority -Measures utility, effectiveness, ease of use, compatibility, bug-free operation and other relevant product attributes versus competitive offerings in the same application and segment.

•Customer Satisfaction -Measures longer-term user acceptance and repeat usage of follow-ons updates and survey responses for the company’s products and service support.

There are other factors that indicate relative value, but those listed above are the most important.

The scoring of these factors is applied to the financial evaluation in order to arrive at a final valuation.

The presence and strength of these intangible factors is not a guarantor of success.  However, their inclusion provides a premium over the current financials valuation.  This enhanced analysis does give a prospective investor, partner, buyer, or third party financing source, a reasonable view of the quality of the company’s future business prospects.

John De Puy is the CEO of Oaktree Ventures, Inc., a San Diego based venture firm specializing in corporate finance.