What's Your Right Asking Price

Anyone considering a business sale faces the same question: How much is my business worth? A few quick exercises can give you the proper asking price.

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It's time to put some thought into how much your business is worth. A few quick exercises can give you a good estimate, allowing you to properly set an asking price.

Step 1: Get your financial statements in order.

If by any chance you keep your business records in a checkbook register or shoebox, here's what you absolutely have to do before pricing your business for a sale: You have to assemble formal financial records for your business for this year and the previous three years (if your business is that old).

Unless you're skilled in accounting, work with a bookkeeper or accountant to prepare the following forms:

Income statement showing your gross revenue, costs, and how much your business made or lost each year.
Cash flow statement showing how money was received and paid out of your business and how business assets changed as a result.
Balance sheet showing the value of all tangible assets owned by your business less the liabilities your business owes.
Seller's discretionary earnings statement, also called the owner's cash flow, showing how much your business makes after backing out non-recurring and discretionary expenses as described in Step 3.

Step 2: Estimate the value of the tangible assets of your business.

It's essential to list and price all physical assets of your business, including furnishings, fixtures, equipment and inventory, for two reasons:

The worth of tangible assets is important to business buyers, who will require you to provide a complete asset list including purchase prices and current market values.
The worth of tangible assets is also important to you, because if you determine that the value of the assets of your business is very similar to the price you're likely to receive through a sale - which you'll calculate following the next two steps - you may decide liquidation is a more expedient route to recovering value from your business investment.

Step 3: Prepare your statement of seller's discretionary earnings.

To calculate your business asking price, you first need to work with your accountant or bookkeeper to recast your business income statement into what's interchangeably called a statement of owner's cash flow or a statement of seller's discretionary earnings (SDE). Under either name, it is the basis for sale pricing and of primary interest to buyers.

Following is a sample of an SDE statement.

It differs from an income statement in two ways:

The income statement reflects the full range of normal and legal deductions, resulting in the lowest-possible bottom line and taxable profit.
The SDE or owner's cash flow statement presents the full earning power of your business after adding back in one-time, non-recurring purchases and discretionary expenses shown on your income statement but not essential to business operations.

Mike Handelsman is group general manager for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces. @BizBuySell