Deciding the market value of a business is the most difficult part of the selling process.

Business owners often have misconceptions, believing the business is worth more than the market value. A broker or a business valuation service is the best bet in determining a value that is in line with what the market is willing to pay for the business.

The largest component in determining business value is deciphering how much money the business makes. The financial statements are analyzed to create a base value and then subjective factors adjust the sale price either up or down.

Many buyers want to know how much of the business price is allocated to what they can feel and touch, or hard assets. Normally, the higher the value of the asset, the higher the sale price.

Often, a small business is valued by cash flow, hard assets and inventory. When A/R and/or AP are included in a business sale, the price is adjusted either up or down based on the A/R; A/P net values.

The terms of payment affect the business value. A business purchased using a high leverage factor is generally worth more, and sells quicker than one that requires all cash. Business transfers are either the purchase of a company’s assets or the sale of its stock. In the small business arena, a stock sale is usually most beneficial for a seller, while an asset sale is most beneficial for a buyer.

The subjective valuation factors of a business are years in business, employees, the reason for the sale, customer and supplier base and business desirability. Other factors that increase or decrease a company’s market value; market strength, industry growth, appearance, location and owner involvement.

Exit planning provides the road map to control your own destiny; to successfully sell your business and transition to the next stage of your life.

“If you don’t know where you are going, you will wind up somewhere else!”  Yogi Berra

An exit plan helps to establish realistic business, personal and financial goals with a path to achievement.  Your desires in these three aspects of your life must be consistent. Like a road map, you need to know where you are before you can determine where you are going.

A good exit plan begins with an assessment of your current financial situation, a baseline business valuation, and the value of other assets you own.  To establish longer-term goals such as how long you intend to own the business, what you intend to do after selling it and to whom you would like to sell the business (children, employees, third party).  This information lays the groundwork for that determines your future financial needs.

Here’s an article that further talks the need for an Exit Strategy for your business:


7 years ago, TVG represented a seller who was anxious to sell his business so he could enjoy the fruits of his labor.

Like most sellers he had a number in mind he wanted for the business and wasn’t too keen on the deal structure so long the purchase price matched the desired asking price. We were able to secure a buyer who offered the seller the number he wanted, however, it included a significant amount of seller financing. Despite our urging for the seller to consider slightly lower offers with more guaranteed upfront, the seller decided to take the higher offer with substantial seller financing.

Everything was going great for the first few months and about six payments in, the payments stop and the buyer was in default.TVG client spent eight months and over $100,000 in litigation costs to resume control of his business, which by then revenues were down 50%.

The TVG client worked hard to reestablish his business and slowly built the business back with revenue and cash flow stronger than before. TVG successfully helped the client sell the business again.

Key Takeaways

  • Strongly weigh the cons of a deal financed 100% by the seller
  • Trust your gut in judging the character of a potential buyer
  • Sometimes in life things don’t go well, it takes grit to survive