Question

List and Discuss five factors that drive value in corporations

Answer 1

Factors that drive value in corporation/business:

1)Customer concentration

Most successful companies try to reduce dependence on a few large customers. Should any one customer be lost, the effect on business earnings is minimal. The more loyal customers a company has, the higher its value

2)Business competitive advantages

Sustained competitive advantages such as great technology, exclusive distribution rights or highly loyal customer following are sure value creators for any business.

3)GROWTH.

All else being equal, companies that demonstrate stronger growth trends are more attractive to buyers and often command higher multiples. One has to be careful. The growth needs to be profitable, i.e. additional revenue needs to be generating similar level of profit. Notice what happened to Amazon when it announced higher revenue but even lower than expected profit. The stock price dropped over 10%.

4)Profile/Image

Acquirers seem to discount the strength of a company’s brand. Obviously, a firm’s reputation and image in the marketplace are critical to its success, but a company’s identity is usually absorbed into the parent company. The relatively low position of this factor is misleading because a firm’s image is highly important to creating growth potential. And of course, a tarnished public image could irreparably damage a company’s valuation prospects.

5)Technology

Technology has the potential to generate a competitive advantage and create efficiencies that previously weren’t possible. Valuation experts look for innovative, proprietary technology that changes the way a company works—whether it’s back-office software for managing resources or field equipment that makes construction faster, cheaper or safer. New, patentable green construction techniques, for example, could provide a competitive advantage as the demand for LEED-certified buildings increases.