You've worked hard to build your business. You have–

• Made investments in physical, human and technological capital,

• Developed and nurtured customer and supplier relationships,

• Invested significant dollars in advertising and marketing to establish a trade name and/or create a brand. and

• Built a reputation that instills trust and confidence.

Now look at your tax returns and financial statements. Do they reflect the value you identified above? Physical capital has been depreciated at the maximum accelerated rates permitted by the tax code. Investments in human and technological capital, advertising and marketing have been expensed against income. Customer and supplier relationships, trade name, brand and reputation are nowhere to be found.

It is because of this financial disconnect that you never want to use your existing financial records to communicate the value of your business. Balance sheets need to be normalized to reflect the true market value of the tangible assets. Income statements need to be recast to reflect the true economic earning capacity of the business, as opposed to the income that you showed to the tax man. Goodwill needs to be identified to capture the value of intangibles that are not identified by traditional accounting. This is not an Enron style maneuver. Experienced buyers expect to see adjusted financials that are clearly documented and footnoted to explain the true economic value of the enterprise.

Some people will use a "rule of thumb" and tell you that the company is worth some multiple of sales or EBIT or EBITDA. Do you really believe that such a formula can capture the uniqueness and inherent value of the business that you have created? Suppose your sales are more profitable than the average firm's sales. Or perhaps your earnings are spread over a more diverse customer base or you have a unique product line with competitive advantages that makes your earnings much less risky or more likely to grow than those of another firm. Rules of thumb by themselves are only generalizations that tend to undervalue the good business and overvalue the poor business. They are useful as a part of the valuation process, but are not adequate enough by themselves to determine a fair market value.

For all of these reasons, the biggest risk a business owner can take is to go to market without a professional valuation to determine the "fair market value" of your company. You need to work with a company that can provide you with a professional valuation to have a realistic benchmark to assess offers. In the end the buyer and seller determine the price, but a professional business valuation is an invaluable tool to negotiate and influence what that price will be.