What value does your business have and why would someone want to buy your business as it is today? This is the most important question to ask yourself as you prepare for the day when you decide to sell your business. Many owners sell their business for much less than what they feel the business is worth? Why?  Owners build an image of what the business is worth based on how hard they worked to build it. They consider the “blood, sweat and tears” as part of the value of their businesses.  The hard truth is that the value of their building efforts is zero.

So, how do you set the value of your business? You can properly value your business by looking at the business for its intrinsic value which is based on a multiple of the profit your company generates annually (two times to seven times profit depending on the industry).

There are other factors such as patents, assets and intellectual property, but the key is the profit your business generates.

Another important factor in valuing your business is to consider the replacement costs of YOU as the business owner.  If your buyer is an investor, they will not want to run the business. What will it take to hire someone to run the business? And after hiring that person, what will be the excess cash flow to the business? Once you identify that number, you have a business value.  

Most buyers don’t want to “buy a job,” so this is an important consideration.  Buyers have money or access to money and think about the ROI based on current profit to arrive at a purchase price. They think about the potential value of the business as how much it will cost to improve cash flow and sales in the future.  When a business owner identifies this gap and works to improve or eliminate it, they make their business more valuable to potential buyers. How do you value your business currently and what would it be worth if you value it based on what you just learned?