The number that comes before the valuation

Almost every owner starts in the same place: what is my business worth?

It is the wrong first question. Not because the answer does not matter, but because the answer means nothing on its own. A valuation of $3.2 million is good news or bad news entirely depending on a number most owners have never calculated.

The question that comes first

What do you need to net, after tax and fees, to fund what comes next?

Not the gross price. What actually arrives in your account and stays there, set against what your life costs for however long you expect it to last.

Owners resist this question, and understandably: it requires deciding what comes next, which is the harder problem. But without it a valuation is a number floating free of any decision. With it, everything else becomes tractable.

Why gross and net diverge so much

The price agreed is not the money received. Between them sit several things, and I am deliberately not putting percentages on any of them, because they depend on your entity type, your state, your basis in the business and how the deal is structured. Your accountant can put real numbers on this in an afternoon.

What sits in between, in rough order of size:

Tax. The largest single item for most sellers, and the one most affected by deal structure. How the purchase price is allocated across asset classes changes what you pay, and that allocation is negotiated. An owner who learns this during closing has already lost the negotiation.

Transaction fees. Brokerage or investment banking, legal, accounting, quality of earnings work if a buyer requires it.

Debt repayment. Anything secured against the business comes off the top.

Money you do not get at closing. Seller financing, earn-outs, escrow holdbacks against warranty claims. Owners routinely count these as received. They are contingent, and some of them do not arrive.

Working capital adjustments. The business is usually delivered with a normal level of working capital, and if yours is above that at closing the difference is often settled in the buyer’s favour.

The distance between the headline number and the number in your account is not a rounding error. Working it out is a few hours with the right people, and it changes what an acceptable offer looks like.

Then compare the two

Once you have both figures, one of three things is true.

The business clears your number comfortably. Useful to know, and it changes your posture in a negotiation. It also means preparation work is about certainty of closing rather than price.

There is a small gap. The most common case, and the most workable. Twelve to twenty-four months of specific work on the things that move value usually closes it. This is precisely the situation preparation exists for.

There is a large gap. The most valuable thing to discover early and the most painful. Sometimes it means a longer timeline. Sometimes it means the plan changes: keeping the business longer, taking money out differently, or a partial sale. Occasionally it means a sale on your terms is not achievable inside your window, and knowing that at twenty-four months is a completely different situation from discovering it at closing.

Why the gap is the important number

Every other item on a readiness list is a constraint you work within. Owner dependence takes eighteen months regardless of what you want. Your books are as clean as they are.

The gap is the one thing that responds directly to time. More months means more work on value drivers, more months of improved earnings in the trailing figures, more opportunity to fix the specific items a buyer discounts. It is the item where starting early converts most directly into money.

Which is the argument for doing this calculation two years out rather than at the point of listing, when there is nothing left to convert.

Who should do it

Your accountant, for the tax side, and whoever handles your personal financial planning, for the what-you-need side. Not a broker. A broker can tell you what the business will likely bring, which is one half, and has an interest in the transaction happening, which is a reason not to have them build the other half.

If nobody currently handles your personal financial planning, that is worth addressing before it is worth getting a valuation.

Where you stand

Questions F5 and F6 on the Exit Readiness Score ask whether you know your target number and whether you know the size of the gap. They are two of the eighteen and they are the two that most often come back as complete unknowns.