You have worked hard to build your business. You have made investments in physical capital, human capital and technological capital. You have developed and nurtured customer and supplier relationships. You have invested significant dollars in advertising and marketing to establish a trade name and/or create a brand. You have 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 no where to be found.

It is because of this disconnect that you do not 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 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 manuever. Experienced buyers expect to see adjusted financials that are clearly documented and footnoted to explain the true economic value of the enterprise.

Now some people will tell you that the company is worth some multiple of sales or EBIT or EBITDA (the multiple being called a rule of thumb). Do you really believe that such a formula can capture all the uniqueness and inherent value of the business you have created? Suppose your sales are more profitable than the average firms sales. Or perhaps your earnings are spread over a more diverse customer base or a unique product with competitive advantages that mean the earnings are much less risky than another firms or more likely to grow. Rules of thumb are approximations that undervalue the good businesses and overvalue the poor businesses. They are useful as a sanity check, but not adequate to go to market.

For all of the above 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 his/her company. This report should be prepared by an independent, third-party, experienced business appraiser in accordance with standard and accepted valuation methodology. Whether the business is going to be marketed with an asking price or not, the seller needs a realistic appraised value to have a benchmark to assess offers. While in the end the buyer determines price, the business valuation is an invaluable tool to negotiate and influence what that price will be.