The first question many business owner ask at the onset of an M&A process is "How much is my business is worth?". Of course, it's one of the most important and personal aspects of the sale - but knowing the elements that influence the ultimate sale price before trying to sell a business allows founders to tackle the most important value-increasing initiatives to help maximize their future sales price.

To determine how much your business is worth, there can be a variety of things for a founder to consider. Every business is made up of unique and valuable components that sum up to determine the price that an acquiring company is willing to pay. Working with an Investment Banker or M&A Expert with industry-specific experience is the best way to receive a high-quality, accurate valuation - but first, there are factors that any business owner can and should understand prior to valuing his or her business:

Financial Considerations:

Typically, the best place to start is to look at historical company revenue. Reviewing financial records from the past several years allows you to understand annualized revenues and growth trends. From there, overlaying costs gives you a view of your historical profitability and future earnings.

If you have a solid handle on your past and projected earnings (or have had an outside agency run a quality of earnings study), a discounted cash flow (DCF) analysis can be used to determine a company's value based on how much money the business will generate in the future. It’s a popular and useful technique relied upon by financial and strategic buyers when deciding how much to pay when acquiring a company. To perform the DCF analysis, you can use a variety of no cost online solutions and resources.

Business Assets:

In addition to analyzing your revenue, costs, and cash flows, your company’s assets should also be taken into consideration when valuing your business. This list should include things like office equipment, vehicles, company machinery, patents, IP and inventory. Once you’ve considered the value of your company’s assets, you need to subtract corporate debt and liabilities to determine the true value of your company's assets.

Non-Financial Considerations:

Financial figures are important when determining the value of your company, but a business owner also needs to consider other less tangible factors, as well. The strategic benefits your business could offer to an acquirer may be just as important as if not more important than the financials and growth rate of the business. Similarly, business owners should take into account the geographical location of their businesses, customer concentration, and the strength of the business’s reputation and brand.

Knowing Your Valuation Early, And Creating A Plan For Your Future:

If you find that your business is not worth as much as you were expecting, it might be time to better understand the quality and sustainability of your company's earnings, and consider making some changes before starting a full exit process. The most obvious way to increase your valuation is to grow the profitability of the business. To do this, you should look for ways to cut overhead costs, streamline operational processes and explore new avenues to increase sales. You might also want to consider revisiting ways to increase your streams of recurring revenues. For example, if you’re a service-based business, see if you can extend current maintenance contracts or generate new contracts with customers or clients.

Other non-finance related changes can help, as well. Reconsidering the efficiency of your marketing efforts, changing the way you incentivize your sales organization, and developing new and creative industry partnerships are some of the ways many companies change their valuation profile in a short period of time.

Lastly, a focus on company culture can be an easily overlooked aspect of a company's value. Engaged employees, especially those that support the company's most valued clients and customers, are some of the most important people in your organization. Reviewing compensation, employee benefits, and creating a culture that enables creative support of your customer base should be the focus of any business owner looking at selling their company.

For more information on how to accurately calculate the value of your company before you sell, read, 4 Ways to Calculate the Value of Your Company or go to our Business Valuation Calculator to receive a free evaluation.