The traditional formula for selling a healthy business is between one and two times turnover, or four to eight times earnings. But relying on these formulas results in 75% of private businesses being sold for less than they are worth. Consider these alternatives:

First, you recast your income statements for a few prior years. Recasting means taking out the expenses which disappear when the owner disappears… minus the cost of replacement. This includes the owner’s salary, health insurance, car expenses, travel, entertainment etc. When these are all taken out, the profits look a lot bigger.
Second, recast the balance sheet, adding in intangible assets like branding, computer database, copyrights, delivery systems, distributorship, experienced staff, franchises, know-how, licenses, location, low employee turnover, loyal customer base, mailing list, name reputation, supplier base, technology, tooling, trademarks and training procedures. When these are added, the balance sheet looks healthier.

Third, create a 5-year pro forma, a projection of the company’s financial future to be achieved with a new owner’s capital. In short, “explain the past, sell the future.” Then, using traditional methods of valuing discounted cash flow, you calculate the present value of the enterprise. But that’s the not the price you ask a buyer to pay! You want to sell your business at a premium to its enterprise value.
And how do you do that? Most importantly, never give an asking price. If you do, you set a ceiling, and the price will be driven down from there. Instead, ask the buyer to set the price. This will establish the floor, and you can drive it higher from there.

As Warren Buffet once pithily said, “If you don’t know the value of your business I’ll steal it from you.”

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