Factors That Negatively Impact Business Value
The following are factors that can have a negative impact on the value of a business and some are issues that can rear their ugly head during the due diligence investigative period. Keep in mind that this list is a compilation of potential problem areas and do not apply to all types of businesses.
- Accidents
- New competition in the market
- Changes in technology
- Equipment obsolescence
- Facility obsolescence
- Market shifts
- Declining Revenues
- Poor Financial Records is one of the biggest reasons businesses do not sell or sell at a value considerably less than market value.
- Interest rate flux
- Low margins
- Capital improvements needed
- Lack of Supplier Diversity
- Lack of Customer Diversity – If too much business is concentrated in too few customers, the risk factor is increased. Should one or more of the customers discontinue patronage of the firm, revenues will be seriously impacted.
- Uncollectible receivables
- Low backlog
- Restricted credit
- Regulatory violations
- Environmental Issues are of concern because it is possible that any and all former owners can be held accountable by the government for very expensive cleanup costs.
- Insurance Cost and Availability
- Slow Moving, Outdated and/or Excessive Inventory – These types of inventory tie up money and make the business difficult to sell. Buyers will refuse to buy or will deeply discount the value associated with these types of inventory.
- Obsolete marketing collateral
- Key Staff Leaving
- Poor Property Lease Terms – Not having a lease or being locked into a lease with onerous terms, such as high escalations, detracts from the value of the business. Not having a lease to assign to a buyer runs the risk that the landlord will increase the rent for the new owner. If the rent goes up, the earnings go down and consequently the value of the business goes down.
- Product liability claims
- Patent expirations
- Sales contract expirations
- Cash flow problems
