“I have a medium sized company which I have owned for about 20 years. We specialize in the manufacture and distribution of chemical products and have built a good business. However, my children aren’t involved or interested in the business so I am considering selling it. The problem is that I have no idea how to begin the process.”

Since most business owners only sell a company once in their lifetime, it is quite understandable when an owner makes such an inquiry. While the thought of selling their company may seem overwhelming to many business owners, if thought in terms of small steps instead of giant leaps, it is really quite simple.

As part of that process, a professional business broker / intermediary will ask easily-answered questions that will help determine which expenses are discretionary in nature or are not strictly necessary. There will be other expenses that may be non-business related benefits going to the owner and family members, or one-time, non-recurring or unusual expenses that would not be borne by a new owner of the business. These expenses will be part of the true discretionary cash flow that would be enjoyed by a new owner.

This valuation should clearly outline the details that buyer prospects and their advisors would need and can understand. It should be assessed on the same premises lending institutions use for the purpose of determining if the price makes sense.

Just as an athlete might get a physical to determine their preparedness for a marathon, you should also measure your Company’s fitness for the marketplace. A valuation is an unbiased examination of your company’s marketability and helps you pinpoint where your company is in its business cycle. It is the foundation, the meat and bones, on which a business owner can base their readiness to sell.

Other considerations in determining the business value will include competition, regional demand factors, proprietary products or processes, what type of buyer the company would attract, favorable lease terms, advantageous supplier relationships, management’s desire to exit or stay with the business, concentration of customers, and many other relevant factors.

Your company’s history of earnings represents its financial health and can establish the baseline for the monetary worth of the enterprise. The single most important factor for valuation is how much money the business makes. This figure should be maximized and be shown to be maintainable under new ownership in order to get the best price possible when the time is right. Buyers pay for the past, but buy for the future.

Most owners never take the necessary steps to plan their exit and end up selling because of unexpected events or crisis-driven reasons rather than on their own terms. According to members of the International Business Broker Association, 75% of business owners do not know the market value of their company. This is too large a number considering how painless a task it is to achieve.

The sooner you take the first step in determining the value of your business, the more informed and comfortable you will be in planning your next step…..whether it be deciding the time is right to sell now, or making improvements for a future sale.

Understanding the value and what drives the value of your business is the next stride in the small-step approach.