A common question for business owners when they start to ponder their exit strategy is how to figure out what their business is worth.  Valuation experts like the Corporate Cranium’s Roben Hunter can give you an expert assessment based upon professionally accepted valuation methodologies.  Roben will assess value based upon multiple factors including past performance, future projected earnings, sales of similar businesses and recognized industry based multiples.  All of those are especially valuable when looking at an arm’s length sale to an outside party.  I highly recommend her when you need a true fair market value for your company.

But in my experience, value is often determined not in the abstract but by the factors that exist for your particular situation.  Oftentimes, closely held businesses are sold to a next generation relative or a company insider who may not have the resources to pay true fair market value for your business.  Most business owners I know have an emotional attachment to their business and want to see it succeed and prosper once they are gone.  Oftentimes, they need to have it succeed in order to get paid the amount they are looking for when they cash out.  In those situations, the true fair market value of the business may be less important than what the prospective buyer and the business itself can afford to pay once you are gone.

In this situation, the business owner will often be sacrificing some of the objective or “street” value of their business in order to accommodate a preferred buyer or to avoid the protracted process and cost of finding an outside buyer.  In that type of situation there are several key factors to consider.

The primary question is what can the business and the buyer afford?  Does the buyer have any resources outside of the business to use as a down payment or security?  If the answer to that question is no, the question then becomes what can the business afford to pay you if you aren’t there?  Is your chosen buyer capable of keeping it running long enough for you to get your value?  Do you need to stay in the business to preserve customer relationships or provide particular expertise?  If so, how do you value those services independent of your sale price?  What security exists in the event he or she does not succeed?  Are there hard assets or real estate that can be sold to complete your buy-out?  If the buyer doesn’t succeed and the result is that you get your business back, what does it look like if that happens and will you be prepared for it? In the end, how important is it to you that the business be in the hands of someone you know and not a third party?

All of these questions need to be considered as you determine the value of your business in a sale to an inside buyer.   The reasonable price you can expect from an inside buyer can then be measured against the street value Roben can help you identify.  That difference should help you decide whether to consider a sale in-house or to a third party on the open market.