Business valuation is affected by the industry conditions

If you are working on a business appraisal, a big part of the analysis is reviewing the industry outlook. In many ways, the industry in which the business competes is far more important than the general economic situation. If you are valuing a strong company in a growing industry, its valuation is likely to be higher than that of a failing business that operates in a shrinking industry sector.

As part of your business valuation, you need to determine the overall industry growth potential, and the ability of your subject business to compete successfully. Some of the elements that should go into your analysis are the strength of the management team, the skill set of the key staff, financial condition of the firm, customer base, technology and other intellectual property assets, among other factors.

Your business appraisal report should outline clearly the industry sector and how the company fits into the competitive landscape. Business people and professionals reading your business valuation report should be able to gain a solid understanding of the risks faced by the company, its competitive advantages, and see how your conclusion flows from this thinking.

To make a compelling argument, you would need to provide a well researched description of the industry and the company’s plan on staying competitive. This is necessary in order to come up with realistic business valuation scenarios, such as the forecast of business earnings and assessment of the risks it is likely to face going forward.

Without this foundation, your valuation methods will merely generate unsupportable numbers. Remember the old adage, “Garbage in, garbage out.”

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