After years of working to build your business, you may find yourself looking forward to retirement or a new career. Before you decide to sell, it’s a good idea to estimate what your business is worth. This will help you plan for your future – and capture the best selling price.

Business valuation approaches

To get started, look at your business through the eyes of a buyer. To get this perspective, there are three main business valuation approaches to consider:

  • Income-based: This approach looks at cash flow from the past three to five years and projected earnings for the future.
  • Market-based: This approach analyzes the price of similar companies to approximate the market value of your business.
  • Asset-based: This involves breaking up your business into individual assets – the building or factory where you operate, equipment you own, etc. – and valuing them separately. The sum of all your assets determines your business’s worth.

Preparing for the appraisal

Similar to a house that is up for sale, it’s important to make sure your business appeals to potential buyers. There are many steps you can take to make your business more attractive before an appraisal:

  • Get your books in order: Have at least three to five years of accurate, up-to-date financial information. Make sure to resolve any outstanding legal problems.
  • Increase cash flow: Cash flow is the main driver of business value. Increase sales and cut costs to build up cash flow.
  • Gather important documents: This includes articles of incorporation, major contracts, partnership agreements, and real estate leases.
  • Brighten your curb appeal: Tend to any neglected maintenance issues, and make sure to re-paint and clean up your facility.
  • Cut the apron strings: Reduce the importance of your role by hiring a solid management team who can facilitate a seamless transition. Document any procedures that are essential to running your business. For example, a restaurant owner may write down recipes, which may add value for a potential buyer.

The sale and transition of your business is a process that can take time, but you can get ahead by planning early. By taking the right steps and seeking help from valuation professionals, you’ll be better prepared to get the right price for your business.

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