Getting a business valuation is often the first step when a business owner is thinking about selling the business. Every year, thousands of small business owners get a business valuation. A common question that arises is: “How should I treat my books to maximize the sale price of my business?” This article provides 3 tips that you can implement in your business that will make sure you get the highest valuation possible when it is time for you to sell your business.

Tip #1: No cash business. Many small business owners may be tempted to pay employees using cash, pay vendors using cash, and accept cash from customers. While there is nothing wrong inherently with using cash as a form of payment, what ends up happening is that the business owner chooses not to record the cash business on the company books. For instance, a restaurant owner might report $200,000 a year in sales on the books, and do another $100,000 a year in “cash business” that is not reported on the books. While this might seem like a good way to minimize one’s tax obligations, it is actually an illegal way to do so. There are so many legal ways to minimize one’s tax obligations as a business owner that there is no reason to utilize illegal ways to do so. When a business valuation is performed, the business appraiser can only use what is stated on the books. Due to the lack of documentation, the “cash business” that is done on the side cannot be taken into account when the business appraiser calculates the business value. In other words, doing cash business to evade taxes is not only illegal, but also lowers one’s business value as well.

Tip #2: Keep extremely organized books.Put yourself into the shoes of a business buyer. As a business buyer, you want to know that the financial performance of the company claimed by the seller is supported byevidence and documentation. In other words, business buyers want to see meticulous books kept by the seller, and will only pay top dollars for the business is the business buyers feel good about all the documentation they see. Keeping extremely organized books is not just for the buyer’s eyes, but also for the lender’s eyes. Whenever bank financing is involved in the purchase of a business, the lender is going to require documentation that backs up the financial performance of the company. Not having organized books is one of the surest ways to decrease one’s business valuation. If the lenders do not like the lack of documentation and refuse to finance the deal, the business seller has just limited the pool of potential buyers to those who have all the cash to buy the business without bank financing. Even then, those buyers who have all the cash will likely discount the offer price severely to justify the risks involved.

Tip #3: Make sure the person giving you the business valuation is recasting your financials. It is common for many small business owners to aim for a low bottom line on the tax return in order to minimize their tax obligations. The business appraiser or business valuation service you use should be experienced in the process of financial recasting so he or she can pull out the discretionary expenses, non-cash expenses, and other items not relevant for the business buyer so that the true owner’s discretionary income can be shown. In other words, it is inadvisable for business owners to adjust their books just because they are thinking about selling their business. The books should be kept the same way, and the business broker or business valuation company will perform a financial recast to adjust the EBITDA, ODI, and/or balance sheet items to show the value of the company to potential buyers.

Advantage Business Valuations provides business valuation services for small to mid-sized business owners in the United States. Founded by Aaron Muller who has valued thousands of companies as a business broker, Advantage Business Valuations helps small to mid-sized business owners determine the value of their business with ease and confidence. To discover the value of your business, visit www.AdvantageBusinessValuations.com.