As a small business owner, the best thing you can do for your business is to start building business value now.

Value is the driving force behind a successful small business exit/sale. By deliberately building and documenting real business value, sellers attract more prospects in the business-for-sale marketplace and ultimately receive higher sales prices for their companies.

But many small business owners don’t think about building business value until they are ready to put their companies on the market. Faced with an appraisal that falls below their expectations, sellers desperately search for ways to quickly boost value–and are usually disappointed. At that point, it’s too late to generate the kind of valuation they need to achieve their exit goals.

So regardless of whether you intend to sell your business later this year or many years down the road, the best thing to do is to get serious about strategically building your company’s real market value.

Building Business Value

Building business value doesn’t happen overnight–it’s a process that requires time, focus and a carefully orchestrated plan to increase the value of both tangible and intangible assets. As you prepare your value-building strategy, there are a few high priority actions that are worth considering.

1. Get Organized

Valuation battles can be won or lost based on documentation and organization. For example, from a buyer’s perspective a profitable business isn’t profitable unless the seller can document a track record of positive business earnings. In addition to outlining your company’s financial history, meticulously document the condition of business assets and create lists of liabilities, leases, and other tangible items that will be important to buyers. Creating an operations manual that helps a potential buyer understand the key elements of running the business will go a long way in building confidence in a buyer that they can successfully take over your business.

2. Grow Your Customer Base

One of the most effective ways to increase the value of your small business is to deepen and expand your customer base. If geographic expansion isn’t feasible right now, think about expanding your product line or leveraging online channels to reach new market segments. At the same time, make a concerted effort to strengthen and document customer loyalty using customer surveys, loyalty programs, or any other similar tactics that will effectively collect measurable feedback. When buyers come knocking someday, these actions should result in a higher offer price for your business.

3. Nurture Your Brand

Your company’s brand has real value in the business-for-sale marketplace, especially if you have taken steps to raise its profile in your market or industry. Consider new marketing efforts that can build your company’s value in both the short and longer term. If you haven’t promoted your brand online, now is the time to get started. Today’s buyers are very interested in companies that have an Internet presence that includes a well-trafficked and highly effective business website.

4. Cultivate a Workforce Development Plan

For a new owner, the quality of your company’s existing workforce will be a determining factor in post-transition success, and therefore how much they might pay for your business. Since buyers want assurances that the workers they inherit are capable and motivated, it’s important to create and document a robust employee development program with retention rates that meet or exceed industry averages. Take actions to ensure your most valuable employees will stick with the business through salary reviews, profit-sharing, or other incentive plans.

5. Improve Your Physical Assets

A new coat of paint can go a long way toward impressing prospective buyers. But to generate real business value, think about making meaningful improvements to your facilities, equipment, and other physical assets. After you clean up any deferred maintenance issues, consider expanding your facilities or upgrading to the latest technologies to significantly improve your company’s appraised value. Companies that are prepared to compete successfully for years into the future will have significantly higher value to potential buyers than one’s that are behind the times.

Building business value isn’t complicated. As a small business owner, you know your company’s strengths and weaknesses and can probably list several strategies that would make your business more valuable to potential buyers. All that’s left to do now is convert those strategies to action items. Make 2013 the year you begin to substantially increase your company’s real market value.

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Breach of Contract Complaint for Negligence Form

The Breach of Contract Complaint for Negligence Form is used by individuals or entities to notify a party that, due to a negligent breach by the other party, you will no longer be bound by contract, and they may owe you damages. This form is used by any party in a contract where the other party has breached by not paying, not performing, or any other negligent action. This form is customizable to your company’s specific usage.  View tool

Business Continuity Plan

The Business Continuity Plan form is used by companies to detail how business will continue if a disaster or emergency occurs. The Business Continuity Plan provides a comprehensive template for documenting all business operational functions by department, company, employee, and vendor information, inventory, emergency procedures, post-disaster plan, etc. This form should be completed and distributed to all company employees to prepare for disasters as soon as possible.  View tool

Business Continuity Plan Template

The Business Continuity Plan Template is used by companies to detail how business will continue if a disaster or emergency occurs. The Business Continuity Plan template provides a comprehensive outline for documenting all business operational functions by department, company, employee, and vendor information, inventory, emergency procedures, post-disaster plan, etc. This form should be completed and distributed to all company employees to prepare for disasters as soon as possible.  View tool

Business Valuation Model for Free Cash Flow

The Business Valuation Model is used by companies to predict revenue growth, profits, and expenditures based on the past information the company has on record. The Business Valuation Model provides a way to track company cash flow for potential investors, clients, or shareholders that need to evaluate efficiency, profitability, and overall success. This model is used when making a quarterly, semiannual, or annual report of a businesses success. The report is then used in presentations to clients, partners, or investors.  View tool

Change of Control Agreement

The Change of Control Agreement is used to secure rights to compensation for an employee in exchange for their continued employment when a company changes ownership. The Change of Control Agreement provides a contingency plan in case the company changes ownership resulting in the employee being laid off without cause or quitting following this change of control. When this happens the agreement ensures that the employer will pay out a severance package of some kind to the employee.  View tool

Depreciation Calculator Spreadsheet

The Depreciation Calculator Spreadsheet is used by companies for depreciation calculations. The Depreciation Calculator Spreadsheet contains depreciation formulas embedded to help companies evaluate depreciation expenses more efficiently. This form is customizable to fit a company’s specific usage.  View tool

Depreciation Expense Spreadsheet

The Depreciation Expense Spreadsheet is used by companies for a comprehensive evaluation of depreciation expenses. The Depreciation Expense Spreadsheet provides depreciation formulas embedded to help companies evaluate a company’s depreciation expenses. This form is customizable to fit a company’s specific usage.  View tool

Depreciation Worksheet Example

The Depreciation Worksheet Example is a template used by companies for creating a worksheet to evaluate depreciation expenses. The Depreciation Worksheet Example organizes and outlines a company’s depreciation expenses and is customizable for a company’s specific usage.  View tool

Partnership Dissolution Agreement

The Partnership Dissolution Agreement is an agreement between partners of a venture whereby parties have agreed to the dissolution of the partnership. The Partnership Dissolution Agreement agreement sets out the procedure of liquidation, how debts and liabilities of the partnership are assumed and how the proceeds from liquidation are divided amongst the partners. This agreement is customizable to fit a company’s specific usage.  View tool

Project Transition Plan Template

The Project Transition Plan Template is used by project leaders and organizations as a detailed guide for creating a Project Transition Plan. The Project Transition Plan Template includes sections dedicated to: the project overview, system support resources, budgeting, and more. This template is downloadable and customizable to your specific needs.  View tool

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A successful small business sale begins with a solid grasp of business valuation. Here’s what you need to know to set your company at the right price.

Valuation can make or break a business sale because for many sellers, attaching a dollar value to their company is a touchy subject–especially if they have spent years building it from a fledgling start-up to a profitable enterprise. Left unchecked, the valuation process can quickly devolve into a pricing routine that is rooted in personal attachments and other subjective inputs rather than solid data based on marketplace realities.

Let’s be clear: the actual value of your business is the amount someone is willing to pay for it in the business-for-sale marketplace. Period. Personal feelings about your company’s worth are far less important than sound valuation methodology, accurate documentation, seller financing and other factors that could potentially influence value.

Common Valuation Methods

One of the reasons business valuation is such a complicated issue is because there are many acceptable valuation methods. Rather than using a “one-size-fits-all” valuation approach, sellers need to decide which method is right for their business based on industry, size and the circumstances of the sale.

An asset-based valuation is a straightforward method in which the value of the business is determined by the total value of the company’s tangible and intangible assets. The challenge with this method is that asset-based valuations can over-simplify the process and neglect the value of the company’s earnings potential. That is why asset-based valuation is a common method for the sale of defunct businesses and liquidations, but not as common for thriving companies.

The earnings multiplier method is often the best way to assign value to a healthy business that will be listed on the open marketplace. By basing price or value on some multiple of the business’s earnings potential, prospective buyers gain the ability to translate the purchase into earnings and an informed return on investment (ROI) estimate.  This also provides a more tangible and simpler basis by which to compare different businesses in different industries or locations.

However, even the earnings multiplier valuation method presents challenges. Although earnings data is based on the business’s historical financial performance, the calculation requires earnings to be precisely defined and agreed upon by both parties. Likewise, you will need to select the right multiplier to apply to defined earnings. There can be a large variance in multipliers (e.g. 1, 3, 5, 10 or more) since the valuation reflects business risk and industry standards. With that being said, a simple way to get to a proper multiple is to work with a business broker who can share recently sold business comparables (commonly known as “comps”), so that you can see what multiples businesses in your industry and location have historically or recently sold for. Prior to working with a broker, you can visit business for sale websites like BizBuySell.com or BizQuest.com to see what prices and multiples of cash flow or revenue current businesses are listed for and have sold for.

How to Improve Business Value

Business brokers and valuation experts often find that sellers are surprised to discover that the valuation process yields a lower-than-expected asking price for their business. The good news is that if you are not happy with your business’ estimated value, there are steps you can take to increase it prior to a sale. It is important to start immediately however, as you need to start planning months or years in advance to implement the kinds of changes that substantially improve the value of your company.

From a buyer’s perspective, proven profitability and future earnings potential are the most attractive qualities in a potential business acquisition. By documenting a multi-year track record of profits and positive cash flow, you can drive up the value of your company–substantially, if you choose to use the earnings multiplier valuation method.

But it’s also important to strategically position your business for future earnings, identifying advantages your business either has or will have in the general marketplace. In some instances, the future prospects of the sector itself can be a factor in driving up business value.

Another strategy for improving business value is basic organization. Carefully maintained financial records, documented employee policies, a neat and clean facility–it all counts when it comes to the amount buyers are willing to pay for your business. Simplicity has value, and the easier it is for buyers to understand your business and envision themselves at the helm, the more likely it is that your business will sell for its full value.

Seller financing also plays a role in improving the value of your business. Although financing part of the sale is not an option for every seller, buyers are willing to pay more for businesses that include some level of seller financing, particularly in tight credit markets. In fact, in today’s tough lending environment, we have seen seller financing become an essential tool to completing transactions. Business owners who use their network and business-for-sale website listings to advertise their willingness to finance part of the deal should expect a significant uptick in the number of offers.

Finally, most sellers ultimately realize that they need to enlist the assistance of a qualified business appraiser or broker to accurately value their companies. A good appraiser or broker, with a proven track record in your industry, can significantly shorten the sale process by ensuring that your business is priced to move in the current market.

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Here’s how to build a small business you can sell–even if your exit is still years away.

Sometimes I encounter entrepreneurs who think that a successful business sale boils down to luck–simply running into the right buyer at the right time. Although identifying the right buyer is definitely an important part of the process, veteran entrepreneurs know that there is nothing random about a profitable small business sale.

In my experience as general manager of one of the world’s most heavily trafficked business-for-sale marketplaces, the most successful business sales combine ample amounts of strategy, planning and hard work (and sometimes, even a little luck). In fact, the businesses that sell most quickly and for the highest amounts are the product of a long-term effort by the owner to build up the value of their business, eventually making it much more attractive to potential buyers.

How to Build a Saleable Small Business

There are a variety of characteristics that buyers look for in a small business acquisition. From a seller’s perspective, a handful of achievable features yield the best results when the business is eventually listed for sale.

1. Recurring Revenue

Recurring revenue streams are attractive to buyers, for obvious reasons. If the buyer can count on a monthly or annual revenue stream from each customer (e.g. a storage rental unit business), it becomes easier to budget monthly income. Consistent revenue streams themselves justify paying a higher price for the business. As much as possible, explore ways that you might be able to build recurring revenue streams into your business model.

2. Consistent Profitability

In addition to recurring revenue streams, buyers value bottom line profitability. Although profit is always a business goal, it’s important to establish a track record of consistent profitability in the years leading up to a sale. Consistency is important because small business owners live off of the proceeds or profits of their business, so intermittent lean years can really cramp an owner’s lifestyle and budget. It can also be helpful to demonstrate the business’s untapped potential by developing a growth strategy or securing competitive advantages in your industry.

3. Branding

Having a “brand” behind your business means that it is differentiated from other similar businesses, and that customers will pay more for your products or services than for similar products or services from competitors. A brand is an asset that can add significant value to your company in the business-for-sale marketplace. The caveat is that strong brands don’t appear overnight–it can take years to develop a strong and established brand. But if your brand dominates your target market it is an investment that will pay off in both the speed and final price of your business sale.

4. Physical Assets

Some entrepreneurs prefer to minimize the amount of physical assets owned by the business, leasing (rather than buying) capital equipment, real estate and other resources. But to build a business you can sell, it’s essential to maintain a portfolio of assets. Assets improve a buyer’s ability to secure financing because they reduce risk by providing security in the form of collateral.

5. Recordkeeping

Accurate recordkeeping is an important trait in highly marketable small businesses. Financial statements, asset inventories and other records need to be thoroughly compiled and updated. If buyers suspect that your records don’t accurately reflect the business, it can lead to a breach of trust that can jeopardize the sale process. Meticulous records, on the other hand, can influence valuation and drive up asking prices.

Other features like a carefully crafted transition strategy or the ability to provide seller financing can also improve the salability of your business. The bottom line is that the process of building a business you can sell isn’t overly complicated–it just takes planning, consistency and a little extra effort.

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Who’d put a price tag on the White House? Truth is, you can figure out a fair market value of just about anything. Try it with these tips.

Earlier this week the real estate website Movoto.com had some fun trying to set a smart listing price for the White House. To do so it recruited a luxury homes expert who proposed $110 million, and then said he’d expect a sale price somewhere between $75 million and $80 million.

The thing is, that’s ridiculously low. Earlier this year a Russian billionaire dropped more on a penthouse apartment in Manhattan. Granted, real estate prices are higher in New York than Washington, D.C.—but c’mon!

There’s a key lesson here for entrepreneurs. Figuring out valuation is tough. We ask ourselves over and over: “What are our products and services worth to customers?” And maybe someday, if we do well, “What is my business worth to a prospective buyer?”

I’ve been working on a writing project with Ken Marlin, managing partner of Marlin & Associates, a boutique financial and strategic advisory firm. With this White House story in mind, I asked him to talk about how to put a smart price tag on just about anything—especially when there is no active market shaking things out for you.

Here’s the five-point, back-of-the-envelope plan he came up with.

1. Understand precisely what’s special about the asset.

Movoto’s expert estimated the listing price based on the White House’s size and location, but of course that has almost nothing to do with why someone might theoretically want to buy it. They’d do so for the history and the symbolism. (Wouldn’t you love to be a fly on the wall as a listing real estate agent walked through the White House, suggesting that it be staged a bit differently, or that that facade would be more striking if it were painted a nice robin’s egg blue.)

“You’ve got to know what’s really cool about the property, or about the business,” Marlin said. “And, that’s what you have to make sure you highlight and communicate to potential buyers.”

2. Understand the range of potential buyers.

The flipside of this is that you have to figure out how the asset—whether it’s real estate or a business—would fit into a potential buyer’s portfolio.

If you’re selling a business, for example, you might find that potential buyers might want to acquire you for purely financial reasons. Others might want to acquire you strategically as part of a plan to continue building their businesses.

As for the White House, Marlin said, think about who might line up to bid on it.

“You’d have hugely wealthy Russian oligarchs. Donald Trump would want it as condos with a golf course on the South Lawn,” he said.

3. Create a market of those potential buyers.

Valuations are always tough when there is no functioning market, and thus no comparable sales to point to. So a smart entrepreneur, whether he’s trying to sell a company or a piece of iconic real estate, tries to create one.

Often, that means staging an auction. You don’t need hundreds of potential buyers: just two, although having more is better.

“When we advise sellers, we tell them you want an auction. When we advise buyers, we say you want to avoid an auction,” Marlin said.

4. Be trustworthy, and create bidding comfort for buyers.

Whoever buys the asset—whether it’s the White House, a product you’re selling, or your business—wants to pay as little as possible, of course. But there’s a second factor that a potential buyer considers in coming up with a bid: He or she doesn’t ever want to look like an idiot.

So your job as a seller is to give them a good-faith basis for your asking price or listing strategy. And, you need to negotiate in such a way that the potential buyer understands you could legitimately walk away.

“Nobody wants to look stupid,” Marlin said. “So, if you’re asking them to pay twice as much as the guy down the street, you need to give them a reasonable basis for that.”

5. Remember: You’re trying to sell the future.

Here’s where the strategy diverges a bit between selling something like the White House and selling a business. With the White House, a buyer would mostly be buying the past.

But while business buyers need to understand your asset’s history, they’re only interested because they need to understand the future.

“That’s what they’re buying—the future. And a buyer always has a fear that you know something they don’t–that you’re selling at the top of the market,” Marlin said. “They don’t care about the past. From a business perspective, from a corporate perspective, you have to help a prospective buyer see the future the way you see it.”

The bottom line, Marlin told me, is that putting a price tag on just about any asset is, well, about much more than just the bottom line. So you’ll do yourself a service by thinking long and hard about the people involved in the transaction.

“Valuation and negotiation are as much about the human element as they are about math,” Marlin said. “Probably more about the human dimensions. You can’t just apply the math and say, ‘My competitor sold for 12 times EBITDA, so multiply my EBITDA by 12.’ It just doesn’t work that way.”

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