9. Rule of Thumb Methods

These are rough guides based on industry averages. Many industry organizations have developed methods for their particular industries. They are highly unscientific and hardly rigorous but act as a good "gut-check". You certainly wouldn't use them on their own but they can be useful to check that value you've arrived at using a more scientific approach is in ballpark.

10. Tangible Assets (Balance Sheet)

This method is basically a value of business's current assets and nothing else. Typically used where business is losing money. This approach will usually be utilized when selling business is just a matter of getting best possible price for equipment, inventory and other assets of business. A good strategy is to approach other firms in same business that would have a direct use for such assets.

11. Multiple of Earnings

A multiple of cash flow of business is used to calculate its value.

12. Value of Specific Intangible Assets

The value of business is based on how much it would have cost buyer to generate intangible asset. Typically used where specific intangible assets that come with business are highly valuable such as a customer base. Customers with a high likelihood of being retained are valuable in most industries.

The most appropriate valuation method for you depends very much on nature of your business. If you manufacture widgets, for example, you'll want to use asset valuation method. If you offer website design services, on other hand, you'll want to use capitalization of income method instead. If you're selling a web- based business where major asset is your high traffic volume and/or list of ezine subscribers, you will probably want to use value of specific intangible assets method, such as 10 cents per subscriber (or whatever going rate is).

Is more than one valuation method applicable to your business? If so, calculate value of your business in accordance with all of them and see which gives best result (i.e., highest value). Another good approach is to average your calculations to get a reasonable ballpark figure.

Whichever method you choose, understand it inside out so that when time comes, you can authoritatively justify your asking price to potential buyers. Pulling a figure out of thin air without any substantiation whatsoever is much less impressive than being able to say, with confidence, "I worked with my advisers using a number of different methodologies to value business. We adopted value of specific intangibles method because backbone of business is our large, loyal ezine subscriber database. We also calculated it on basis of capitalization of income, which yielded a similar value. I can show you calculations if it will help you see where number comes from."

By following this approach you may not necessarily get value you are after (for this reason, many sellers artificially inflate their asking price so they have room to be negotiated down), but at least you have a solid starting point for negotiations and are much more likely to be able to negotiate a price both buyer and seller are able to live with.

Consider how you’re going to obtain new customers and how you’re going to keep ones you get. What are your goals for new business development? How many customers do you want? How many can you handle?

This section also encompasses new product (or service) development. What will you introduce during coming year? When and for how much?

FINANCIAL PLAN

This section addresses your short-term and long-term financial goals. It might be least fun but most important section of your business plan. You don’t have to be an Excel genius to do it. Here you determine your company’s start-up cost (if new) or overhead costs (if it is an existing enterprise). You look at pricing and potential for profitability.

Your budget also is contained within this section. What are your fixed and variable expenses? List various expenses and estimate how much you’re going to need each month. How much can you afford for advertising? You also outline equipment purchases, like a new PC or printer, a Zip drive or a new telephone.

EXECUTIVE SUMMARY

The last part you’ll write, first section to appear, it sums up overall intent of plan. Write it as if you are going to show it to others to explain your vision.

There, we kept it simple. If you need a more complex, detailed plan, here are some resources:

Here you’ll find a business plan template

http://www.moneyhunter.com

This site has sample plans and some advice

http://www.morebusiness.com

Here are two software packages to help you create a credible plan.

BizPlan Builder Interactive ($90, www.jian.com) offers a template to make a fill-in-the-blank plan.

Business Plan Pro 3.0 ($90, www.paloalto.com) uses a wizard like tax or financial software you’ve seen.

As you write your plan, think beyond what you’re doing today to what you expect to do (or may be forced to do) tomorrow. Railroads failed because they thought they were in railroad business instead of transportation business. And remember six Ps: Proper prior planning prevents poor performance.