Businesses are bought and sold every day in the United States. Unfortunately, the structure of these sales are often flawed which result in the business owner failing to maximize their sale price. There are a variety of areas that a business owner must assess before he or she begins the process of putting up a business for sale. However, there are two critical components of preparing a business for sale that are absolutely critical to laying down the proper foundation for achieving maximum value when selling a business.

A recent PriceWaterhouseCoopers survey indicated that 70% of private business owners did not know the value of their business. One of the reasons behind this is that a business owner typically uses a formula or averages to try and derive a number, versus an actual valuation based on projected future earnings of a company discounted back to present value. When a business owner bases the sale price of their business on industry multiples and average selling prices, statistically they value their business less than it is actually worth.

Buyers are willing to buy a documented and believable future. However, the documentation most readily available to business owners are the past year’s tax returns and reports created by their financial software. Tax returns and financial reports are inadequate documentation for two reasons. The first is that they only deal with past performance. In order to maximize the sale price, the seller must present a buyer with the future potential of the business. The second reason they are inadequate is that tax returns and financial statements generally have a conservative presentation with the business goal of reducing the company’s tax liability. Conservative tax numbers make future earnings projections appear unrealistic.