Do your homework before planning that sale

Anyone interested in buying your business isn't going to take your word for its worth, so make sure the business's financial background is in order. This means getting your payment history, bank statements and any other paperwork ready for scrutiny.

The next step should be housekeeping - take stock of your assets, including the business's intellectual property. Also, have an up-to-date and accurate list of all your current supplier contracts as well as your customers.

People who are selling their small business may be eligible for concessional capital gains tax treatment under Division 152 of the Income Tax Assessment Act. This can be a significant break, so it's very important to talk to your accountant to see if you qualify and are structuring the sale correctly.

Sometimes employees are as valuable as the business itself, so if that's the case with you, be certain to have a retention strategy for your staff. The best way to do this is through goal alignment. Your staff will be more likely to stay on board if they believe their goals will still be met by the new business owners. Keep an open line of communication with staff, and if keeping them on board can make or break the business deal, consider giving them a piece of the pie.

If you only have one person interested in buying your business, create some competition to optimise your position. Identify multiple purchasers, even if one of those people is you. Everyone wants to feel like they're picking up a hot commodity and creating an auction environment with multiple bidders might get you a better offer.

Finally, speak with your potential buyer to share future ideas and opportunities for the business. If you know of a possible deal or potential for growth through a new channel, it's worth selling it to the interested party.

What are the different methods of valuing my business, and how do I know which is the most accurate?

In addition to industry rules of thumb there are three methods that are often used. As a logic check it's always prudent to compare the results of the method you choose with at least one other and be able to rationalise the difference.

The first method often used is the market value method, which there is no real formula for. It's a "beauty in the eye of the beholder" valuation where your business will go for what someone feels it is worth. It can go a number of different ways - an existing player in your industry can take on the sales and delete your systems and staff, or someone new can come in and buy the lot. It really depends on the situation but overall it's the luck of the draw depending on the market, what's out there and what your potential buyer is willing to pay.

The second method is on the basis of the present value of net earnings. This is calculated by applying required rate of return to anticipated future cash earnings. This varies and is very dependent on the industry the business is in and the specific nature of the business. The determinant is usually risk-based. If you perceive a higher risk then you want more reward thus a higher rate of return on your investment and therefore a lower value. So if you're a newsagent or a chemist, you probably have a licence and barriers to entry. This means there is less risk than say a convenience store, so the business is likely worth more. The present value of net earnings method is formula-driven and a more scientific and logical and less emotive than the first method.

Finally there is the Net Tangible Assets method which simply places a value on the bricks and mortar and plant and equipment. It doesn't apply any value for goodwill or intellectual property because they're not tangible. This is a commonly method used when a business is winding up and assets are liquidated.

When it comes to valuing your business, the real value is little other than what someone is willing to give you for it. Everything else depends on variables that can't necessarily be controlled.

Mark Bouris is executive chairman of Yellow Brick Road, a wealth-management company and small-business adviser that sells products and services for home loans, financial planning, insurance, superannuation, investments, accounting and tax. His advice here is intended as guidance only.

If you have a question for Mark Bouris, email it to Max Mason at max.mason@fairfaxmedia.com.au