Your true net profit is the number that potential buyers will want to know.

Susie Pemberton, Centralia, Mo.
I live in a small town and own a child care facility. My gross income in 2008 was $126,134. Someone’s interested in buying it, and they’re waiting for me to give them a price. I understand that I need to “adjust” my expense report for 2008, but I’m not sure what to use for a multiplier. I’ve been in business for six years, and can see room for expansion in the future. How do I name my price?

By Lenora Chu, CNNMoney.com contributing writer
Valuing a business is not an exact science. Many factors come into play when you're determining an appropriate selling price.

At its simplest, that price will be based on the economic benefit the business is expected to generate for the new owner.

Start your calculation by determining the “seller’s discretionary cash flow,” (SDCF), or true net profit.

To arrive at this number, examine your 2008 accounting records to pinpoint your net income, says Terry Monroe, president of the St. Louis brokerage firm American Business Brokers.

To that number, you should add back any personal expenses such as your cell phone, health insurance and travel costs, Monroe says. The new owner may not choose to pay for such things out of the business cash flow. Including them artificially lowers your business's apparent income, and therefore your selling price.

To put some numbers to the calculation, say you have a business that generates $140,000 in gross income. Your cost of goods was $40,000. That means your gross income before expenses is $100,000.

Then, subtract your expenses. Say you have utilities, payroll, taxes, insurance and advertising costs of $65,000. Personal expenses covered by the business, such as a car payment, health insurance, and travel costs, added another $15,000. For such a business, total expenses would be $80,000.

That leaves a net income of $20,000. But adding back the $15,000 in flexible expenses brings the business's discretionary cash flow, the true net profit, up to $35,000.

Once you’ve arrived at the SDCF, you’ll need to determine an appropriate multiplier to arrive at your business's valuation.

Multipliers vary widely for small companies. Factors include the economic issues affecting your industry, the size of your business, how long you’ve been around, and any risks the buyer might face, says Mark Gottlieb of MSG, a Great Neck, N.Y., accounting firm that specializes in business valuations.

An appropriate multiplier for your industry will likely fall between 1.0 and 2.5, according to Monroe and Gottlieb's estimates.

Thus, an appropriate selling price would be the SDCF times this multiplier.

With an SDCF of $35,000 and a multiplier of 2, a reasonable selling price would be $70,000.

You’ll also want to tack onto the selling price the used value of any physical assets of the business, such as furniture or playground equipment, says Monroe.

If you're serious about selling, the best first step is to consult with a business broker or investment bank to evaluate the specifics of your business and determine an appropriate multiplier.

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If the problem of too many owners is killing the business, it's time to restructure.

Kelli, Bishop, Calif.
How hard is it to split a family business? A mother and three siblings each own 20% of the business but the siblings don’t get along at all.

By Emily Maltby, CNNMoney.com staff writer
First, decide if you are splitting the business solely as an asset or as a tool to seek revenge.

“If it’s the former, it’s much simpler," says Ted Clark, executive director of the Northeastern University Center for Family Business. "As an asset, you need to engage a marketing and research company to create the greatest value, and then sell and split the money. But unfortunately, it usually doesn’t work like that, because the families are emotionally attached to it and want something more than just the money.”

For example, one sibling may feel entitled to more than 20%. Another may not want to sell the company at all but sees it as the only solution to the family conflict. For everyone to come away happy, there needs to be a mediator.

“Try to get a third party to open the lines of communication,” suggests Clark. “Find a professional who everyone can agree is neutral so that no one feels that party has favorites.”

Small business center mediators are trained to get to the bottom of the family problems and keep the mistrust among siblings at bay.

When picking your outside referee, evaluate how well she understands your specific industry and your region. A CPA or valuation expert can help put a price tag on your company, but you'll need someone who is familiar with your industry and region and who can accurately assess your assets, cash flow, branding and local competition.

After you have a valuation in hand, you'll have two options, says David Goad, President of Succession Planning Consultants.

The first is the internal model, where certain current owners stay in management and run the business. In this case, it's best for those members to buy out the other members, using the valuation set by an outside professional.

The second, external model, is useful when none of the current members want to work in business anymore. That means putting the business up for sale to an investor or a competitor. This is a good time to get a business broker involved.

Keep in mind that many business sales deals carried out through payments on an installment note, rather than a cash buyout. If you decide to go with an internal arrangement, keeping some of the family members with the company, Goad recommends talking to your accountant about integrating a "self-canceling installment note" (SCIN) into the deal. SCIN is an arrangement used in many family business situations because it allows the deal to be cancelable at the death of the payee.

"The entire balance due becomes forgivable and no further payments are due to the seller's heirs or estate. Also, when properly planned, neither the value of the business or promissory note is subject to estate tax at the seller's death," says Goad.

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Selling out and shutting down

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Looking to sell your business? Some technology investments are worth the cost.

DC Kirstein, Softcare Computer Consulting Co., Pittsburgh
Do you have any articles that link updating your company's technology and selling your business? I believe that simply improving a company's technology can help increase its resale value. Is this true?

By Christina Crapanzano, CNNMoney.com contributor
It's easy to measure the effect remodeling or upgrading infrastructure like windows or plumbing has on the resale value of a typical home. Not so with a small business – there are very few metrics on how to quantify the value of a company. The Small Business Administration does not keep data on small business sales, according to spokesman John McDowell.

A technology investment that directly helps a business's bottom line will pay off for a seller – but only once it's already paying off for the business. The number-one thing most potential buyers will care about is a company's cash flow.

“Buyers pay for what you have already built, and they buy it so it can grow,” says Domenic Rinaldi, managing partner of Chicagoland Sunbelt Business Brokers.

Mike Handelsman, general manager of sales site BizBuySell, backed that assessment. “It depends on whether the technology relates directly to the ability to impact revenue or cash flow,” he said. “For example, adding a technology can allow you to tap into a new customer base, increasing revenue.” But what buyers will reward is the new revenue stream, not the underlying infrastructure behind it.

Why it is so hard to value a business? Many of a company's best assets are intangible: Its brand recognition, its staffers' skills, its supplier relationships. The motives of the buyer also come into play.

"There are a lot of moving pieces," says Dick Leslie of San Diego's SCORE, a businesses counseling organization. "Are they buying your customer base? Do they like your location?"

Even without statistical evidence of higher resale prices, small business advisors recommend keeping the technology you need for your daily operations current and investing strategically in systems and equipment that will add value. This is especially key for companies in the information technology (IT) field: "If you’re trying to sell technology, you really need to be at the forefront," Leslie says.

Ramon Ray, a small business technology advisor for AllBusiness.com, notes that technology is only one element of business growth. To get the most from your IT investments, you need good leadership, efficient business processes and savvy financial management. Well-implemented systems for managing your company's finances, employees, vendors and clients can pay off handsomely – but botched deployments of new systems are expensive and frustrating mistakes.

Fast working computers for your office and good security systems are must-haves these days. If you have those basics covered, Ray recommends looking at your customer relationship management (CRM) system as a good investment opportunity.

"Without customers, you have no money," Ray said. "Overall, systems that affect how you work with customers – order fulfillment, for example – are of particular significance."

Except in specialized fields, equipment is a commodity. Investments in software and systems will pay off more than sinking cash into the latest-and-greatest in office PCs or printers. Fortunately, software investments don't have to be expensive. Leslie recommends that companies look into "Web 2.0" applications: Web-based systems managed remotely. Salesforce.com (CRM), NetSuite (N), and Google Apps (GOOG) are examples of online business-management applications popular with small companies.

"Those things can be bought pretty inexpensively," Leslie says. "Web 2.0 applications that allow clients to interact with the company are of significant value."

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Selling your business and keeping the gains

Daphne, Matthews, NC
I was planning on closing my business when an employee comes out of the wood work and asked to take it over. Can it be handed over for pennies on the dollar since it was going to be closed out in the first place? The employee promised to help me move out unwanted inventory, give me the cash to cover my current loans on the books, and then take it over. Can that be done without a cash hand out?

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Dave, Gulf Shores, Ala.
I have a full-service plumbing company on the coast. We have 400 active customers and approximately $90,000 worth of assets. Last year's sales were $225,000. I am planning on selling for $210,000. Is that figure reasonable?

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A business owner looking to get out checks with Ask FSB on minimizing the tax bill.

Emile Dauphinais, Charlotte, N.C.
I’m looking to sell my business. What portion of the sale price is counted as capital gains? How long does one have from the sale of a business to use the profits before capital-gains taxation come into play? Will purchasing another business with the profits offset the gains? And does the new business have to be of the same type? I am now in retail, but might want to consider real estate.

By Lenora Chu, Fortune Small Business contributor
Dear Emile: What’s counted as capital gains depends on whether you’re selling stock or assets. Likewise, how your gains are treated depends on whether you’re selling stock or assets of the business.

Proceeds from the sale of stock is treated as a capital gain, says Rob Nowak, senior tax manager of the national accounting and consulting firm Clifton Gunderson.

The capital-gains rate would be determined by the length of time you held onto the stock and what ordinary tax bracket you fall into, says Richard Beauchemin, owner of Charlotte, N.C.-based Carolina Accounting and Tax Service. He points out that the sale of assets will be treated differently depending on the classification of assets sold. These classifications include capital assets, depreciable property, real property and inventory.

Some assets would be taxed at the ordinary rate, some at the capital gains rate, and others at the recapture rate of 25% for certain real-estate holdings, says Beauchemin. Gains or losses on the sale of inventory, for example, are treated as ordinary income and taxed accordingly.

How the assets are held will also determine how you are taxed. For example, asset sales by C-corporations are taxed at corporate tax rates regardless of the holding period or the type of assets sold, Nowak says . These rates start at 15% and step up to as high as 38% depending on the income level for the corporation, Beauchemin adds.

Asset sales by S-corporations generally result in long-term capital gains taxed at the 15% rate (or 25% for certain real estate interests). However, ordinary gains taxed at individual rates can also result, Nowak says.

The timeframe for taxation

As for timeframe, capital gains taxes are realized immediately, says Beauchemin. They are never deferred. Purchasing another business may offset some of the gain through accelerated depreciation, or through expense write-offs on new equipment purchases, says Beauchemin. However, the gain would not be offset dollar for dollar. You have 180 days to reinvest the sale proceeds in a qualified replacement property, adds Nowak.

The business does not have to be the same type. However, the type of assets you purchase would determine the amount of gain you could shelter, Beauchemin says.

All the experts say you should consult your tax advisor for specifics.

Disclaimer: This column provides general information only and is not intended to replace the services or legal advice of an attorney or CPA. Always consult a lawyer or accountant regarding specific legal or financial issues.

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Colleen Stewart, Venice, Calif.
I recently sold my business. Do I have to pay taxes on the money I made from the sale?

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questions.

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Craig Hampton, Verdugo City, Calif.
I developed an award-winning product that has buyers lined up. Due to a lack of funding, I have to put our company and patent up for sale. It took 12 years and all my savings to bring this to market. I do not want to sell. Do you have any advice?

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William, Denver, Colo.
This question is a follow-up to "Who gets the name in a business custody battle?"

What happens when the majority shareholder wants to franchise the business, but the minority partner is against it? The minority partner is not willing to expand with her current partner. Instead, she'd like to go it alone. Does this trigger a buyout? Is that the best and only solution?

What do you recommend? Leave a comment with your answer.

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DH, Wauna, Wash.
Instead of going through all the hassles of starting a new corporation (S-Corp, LLC, etc.) what is the recommendation for pursuing a dormant corporation? If I were able to verify that the current status of said company is in good standing, then what would be the recommendation?

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Should a buyer pay more for a building if selling it would mark the end of the owner's business?

Michael, Salem, Ore.
Dear FSB: My parents have a small business and own the building in which it operates. The person next door would like to expand by buying my parents' building, and keeps asking them for a price at which they would sell. My Dad would like to retire if they sold it, and would lose the income from the business. Two questions: Should the person pay a premium because he needs the building to expand? (Supply and demand, right?) And second, should the value of the business itself be added to the asking price, since he would be putting my Dad out of business?
By Katie Ryan O'Connor, Fortune Small Business contributor
Dear Michael: You are right in assuming supply and demand are at work here, but perhaps not exactly in the way you think.

“Of course, you can set the market value of the property at any price you want, for any reason you want,” says Brad Meyer, president and CEO of Dallas-based Trinity Real Estate Solutions, a nationwide real-estate inspection firm. “But prospective buyers will be evaluating it from various perspectives too: location, ease of access, expansion room, signage exposure, age, maintenance, income potential, area property sales, size of lot, potential hazards (flood, fire, etc.), to name a few.”

The factors that might mean a lot to you – such as making sure your Dad has a well-funded retirement – aren't going to hold a lot of sway with buyers. So be sure to separate your emotions from the market.

“Many sellers have a strong emotional attachment to their property. They believe it is worth more than market value,” Meyer says.

That point is echoed by Gary Grudnitski, a professor of accountancy at San Diego State University with real-estate valuation experience.

A potential buyer isn't going to respond to the fact Dad is retiring in the same way you would, for obvious reasons. “After all,” Grudnitski says, “[Dad] is not precluded from working elsewhere” just because he sells the business.

Your best bargaining chip seems to be with the expansion possibilities the property offers the buyer next door.

“Typically when you are talking about a commercial property, you are talking about what that property will return based on its usage,” says Grudnitski. “If it means they will just have to knock down walls rather than move their whole business premises, I would bargain hard for that. From the buyer's standpoint, this is much different from moving somewhere brand new.”

Meyer recommends you seek a qualified property appraiser or commercial broker. They can conduct a "broker opinion of value" (a detailed assessment of a property's market value, given the economic characteristics of the property and the prevailing trends in the marketplace) and provide an objective opinion on the property.

The Appraisal Institute offers links to expert local appraisers on its website, says Leslie Sellers, vice president of the Chicago-based organization, who recommends you also seek an “investment value” analysis of the property which, more than market value, will take into account some of the relevant intangibles, such as the benefits to the adjoining owner.

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