Many small-to-medium business owners see their business as a part of the asset base that will go towards their retirement capital. For some, the statement "my business is my retirement income" may not be uncommon.

The question is: how much is your business worth and what can you do to improve the value?

Ultimately your business is worth only what someone else is willing to pay. There are, however, a number of different ways in which businesses are valued. These include:

A capitalisation of future maintainable earnings. This method assesses the annual sustainable profit the business is achieving and then applies a multiple that takes into account opportunity and risk.

A discounted cash flow method. This focuses on future cash flows and the expectation of realising those cash flows over time. The net asset backing method. This simply values the business at the net worth of the assets less the liabilities. Industry formulas. These tend to be specific to certain industries and may value at a multiple of revenue or profits.

Today's trend is to focus on the profitability of the business.

In most cases the lower the profits, the lower the valuation. Where there are no profits there is a very real question about the value of the business beyond any break-up value.

When you look at the typical small business it is made up of a series of assets. These typically include plant and equipment, trading stock, debtors and goodwill. All of these assets are relatively easy to value, with the exception of goodwill. Hard assets such as plant or stock can generally be assigned an agreed value without too much argument. Goodwill, on the other hand, is much more difficult to value. Its inherent nature is that it is an intangible asset. You can't necessarily touch or see it, yet often it is the most valuable component of your business - and the component that sellers and buyers will most often argue about.

If you are looking to maximise your goodwill in any possible sale you need to ensure that you have the components in place that reflect its value. Maximising goodwill value is to some extent about making the intangible tangible.

When someone buys your goodwill, what are they paying for? The answer is your future profits and free cash flow. Goodwill in effect is a premium paid in excess of the hard asset value.

It is an amount that a buyer willingly spends to access your established and future profits and cash flow. Depending on the business, a buyer may be prepared to pay somewhere in the range of one to three times your future profits in goodwill.

Some of the components that can make your goodwill more tangible include: an identifiable brand; customer lists; annuity income streams; documented operating systems; supply agreements; location leases; marketing materials; and advertising presence and websites.

And above all, a history of operating profits. Too many small businesses operate their business simply with a tax focus.

A part of the objective is to ensure that taxable profits are as low as possible. Then, when they come to sell their business, they are trying to explain why it is so valuable. The reality is that in many cases they have invested years of their life in a business asset which they have progressively diluted.

If you are contemplating the future sale of your business you need to start building the business not simply with a focus on profits or lowering your taxable income, but with a view to maximising the value of your business asset.

Preparing a business for sale may be a three to five year project. Failure to take the necessary steps three years prior to sale may cost you many tens of thousands of dollars in business value forgone.

For information and advice on maximising the value of your business prior to sale, contact your adviser today.