Placing a market value on a business for sale is one of the truly confusing aspects of a business owner trying to sell on his or her own is that of what value to place on the business. Such thoughts as “it is what I need to retire on” or “it’s what I put into it” are not methods for determining what a business is worth on the market.

Too many business owners also concentrate on gross sales without proper knowledge of the basic operating expenses to profit on their business (cash flow). Cash flow is the true profit of the business and the asking price should be a variable on cash flow. Cash Flow - not gross sales - determines the profitability of the business.

 What is Cash Flow?

Cash flow is profit before taxes. It is what the owner is truly making. Cash Flow is determined by taking the Net Profit or Loss from the tax returns then "adding back" to the Net Profit or Loss any non-essential, non-business related or paper expenses (amortization, depreciation and interest). There are additional "add backs" like one-time expenses or payroll expenses on an employee no longer with the business - just to name a couple.

One of the main problems of owners selling their business on their own is that they grossly undervalue their business. This results in far less proceeds from the sale than what they could have gotten by using a professional to assist them.

FYI – back to qualified buyers needing financing (Section 4 above). The comprehensive cash flow analysis to market value is the primary method used by the acquisition lenders to fund the buyers to help a deal gets closed.

There are also Third Party Valuation options to get a detailed value on your business. These valuations can be quite expensive but do provide the most concrete “book” of your business market value.

IMPROPER MARKET VALUE METHODS WILL GET YOU LESS MONEY