How to Value Your Family Business Before You Sell

A Guide for Small Business Owners Planning an Exit

If you’re a small business owner in Buffalo Grove, or anywhere across the country, thinking about selling your company, whether next year or five years from now, understanding its actual value is one of the most important steps you can take. Too many owners put it off or rely on informal estimates, only to be surprised by the price during negotiations.

At SGL Financial, we work with business owners, many of whom are already planning for a future sale and retirement. As financial professionals, we help you understand how business succession planning fits your current financial picture. 

This article will help you understand why proper valuation matters, what impacts value, and how to plan for an exit that supports your long-term goals, along with providing answers to these three highly searched questions about valuing a business:

• How much is my business worth?
• What are the best methods to value a business for sale?
• How can I increase my business’s value before selling?

1. How Much Is My Business Worth?

The short answer is that it depends on several considerations. First simply is, is your business worth what a buyer is willing to pay? However, that number is shaped by many factors, including your industry, financials, market position, and how well you prepared your business for a sale.

Many business owners rely on rough estimates or rule-of-thumb multiples based on revenue or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). 

While that might give you a ballpark valuation, it’s likely not enough to support negotiations, attract serious buyers, or plan your retirement income strategy.

At SGL Financial, we recommend starting with a professional business valuation. This gives you a solid number based on your company’s specific details and provides an objective analysis of any weaknesses that would hurt the sales price. You can fix these problems before putting the business up for sale.

2. What Are the Best Methods to Value a Business for Sale?

There are three main approaches that valuation professionals use to determine the sales price of a small business. Each approach looks at the business from a different angle:

• The Income Approach

This method is based on projected cash flows and is used for businesses with consistent revenue growth and earnings.

• Discounted Cash Flow (DCF): Projects future cash flows and discounts them back to present value.
• Capitalization of Earnings: Uses a single year of earnings and applies a multiplier based on risk, profit margins, and expected returns.
  

This is a popular method for owners who want to demonstrate the business’s long-term earning potential, especially if they’ve made recent improvements or investments that enhance returns.

• Market Approach

This method compares your business to similar businesses that have sold recently in your market and industry.

• Think of it like you would real estate comps, but for businesses.
• This approach works well if you’re in an industry with active merger and acquisition activity and plenty of transactional data.

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• Asset-Based Approach

This method adds up the value of all business assets, tangible (equipment, inventory, real estate) and intangible (patents, trademarks), and subtracts liabilities.

• It’s more common for asset-heavy businesses or companies that do not produce consistent cash flow.
• Often used for liquidation scenarios or when the business has significant physical assets.
  

A qualified valuation professional may use one or a combination of these methods based on your business type and history. As part of our business succession planning in Buffalo Grove and around the country, we often work alongside these valuation professionals to help you interpret the results and make strategic financial decisions based on the valuation numbers.

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3. How Can I Increase My Business’s Value Before Selling?

Here’s the good news: business valuations are not set in stone. With the right financial planning strategies and enough time, you can often increase your company’s sale value before you exit. Here are a few areas to focus on: 

Improve Profit Margins and Cash Flow: Buyers look at bottom-line results more than top-line revenue. Focus on eliminating inefficiencies, trimming unnecessary expenses, and improving your operating margins.

Reduce Owner Dependence: If your business can’t run without you, buyers may see this as a potential red flag that impacts future revenue. Start delegating responsibilities and building a leadership team that can operate independently.

Clean Up Your Financials: Accurate, well-organized financial statements are critical. Incomplete records can delay or devalue a sale. If you haven’t already, work with your CPA to get your books in shape.

Build Recurring Revenue: Businesses with steady, recurring income are often valued much higher than businesses with transactional revenue. Buyers will view your revenue as more stable and predictable if you shift more of your revenue into subscription models or service contracts.

Diversify Your Customer Base: Too much reliance on one or two large clients can hurt your valuation. Aim to spread revenue across multiple customers, regions, or markets.

Document Systems and Processes: The more turnkey your business is, the more appealing it becomes, so consider documenting clear SOPs (Standard Operating Procedures) for operations, sales, and customer service.

Consulting: You can offer your services as a consultant to the buyer for one to two years. Assuming this fits your circumstances, it can reduce the risk of transitioning a business to a new owner. Current clients or customers may feel more comfortable knowing this type of support is in place.

Start Early: What is the best time to begin these improvements? At least one to three years before you plan to sell. That gives you time to fix problems, improve your recent results, and align your exit strategy with your financial goals.

Let’s Talk About What Comes Next

At SGL Financial, we help business owners in Buffalo Grove and beyond plan smart exits with confidence. As a Buffalo Grove team of CFP® and financial professionals, we don’t just look at maximizing a sales price; we help you build a financial plan that connects your business’s value to your retirement income, tax strategy, and estate plan.

If you’re considering selling your business in the next few years, now is the time to start planning. Schedule a consultation to see how we can help you maximize your outcome and move forward with clarity.