What to do after you have an initial valuation for a potential business to buy

If you followed along in correct process fashion, you should have a few solid potential businesses to continue pursuing and have placed an initial valuation on them.

Why? Because you will need that figure to put in an initial offer so that you can perform a due diligence on the company to get the real, full scoop on it so you can continue with the purchase, modify your offer or drop the deal.

For this post, we'll assume you have made an initial valuation and an offer range that seems acceptable based on the valuation (see this post for a refresher) Theoretically, you have come up with an offer range you can live with and it makes sense, so go for it. The seller just might take it. If the seller balks all the way up to the top of your range, then you move on.

The decision by the seller will tell you if he/she is unreasonable or not and if they are someone you don’t want to deal with anyway. Maybe the seller's mind will change before you find another suitable deal. Or maybe he will come up with a counter offer. You will never know if you don’t put it out there. Don’t make assumptions.

The actual offer is usually made verbally through a broker and will lead to a written Letter of Intent (LOI) if the offer is deemed reasonable by the seller. If you are dealing directly with a seller, then you will begin negotiations with the seller at this point verbally and hopefully agree on a price that will lead to a written LOI.

The LOI is a non-binding agreement that allows you to start a due diligence period in which you will have the chance to "prove" the claims of the seller by getting more financial info and seeing the business in action from behind the scenes. With this additional info from due diligence, you should perform more valuations for buying this business to see if you need to adjust your offer.

For more information on the next step in the buying process, go to the Letter of Intent page of this man business-buying-help.com site.



Best of luck in your business buying success-

The Business Buying Guru

Valuations for Buying a Small Business- An Example

So once you have the knowledge necessary to perform an initial valuation on a small business you're looking to buy, what do you do with it? Let's go over an example.

Here is a typical example on valuations for buying a small business. PLEASE BE AWARE that this is very simplified and I go over it and many more tricks of the trade in the full ebook and the toolkit:

A deli business is on the market for $300,000 and it was attractive enough for you to get to the point of coming up with an appraisal price range. The owner's discretionary cash flow (ODCF) is $135,000.

You perform your valuation using a rule of thumb ODCF multiplier of 2 (this is just an example multiplier and may not be accurate currently for this type of business).

The price seems to make sense at a max of $270,000. Let’s say you determined there are factors in your research that lower the value of the business such as the need to replace some of the equipment at $10,000.

Now you think a max offer of $260,000 would make more sense. In this case, you decide that a low end of $245,000 is not out of the question and is a good starting point.



Now What Do You Do with Your Offer Range?

Well, now you have a reasonable offer with your valid reasons behind it.

Theoretically, you have come up with an offer range you can live with and it makes sense, so go for it. The seller just might take it. If the seller balks all the way up to the top of your range, then you move on.

The decision by the seller will tell you if he/she is unreasonable or not and if they are someone you don’t want to deal with anyway. Maybe the seller's mind will change before you find another suitable deal. Or maybe he will come up with a counter offer.

You will never know if you don’t put it out there. Don’t make assumptions.



Best of luck in your business buying success-

The Business Buying Guru

Initial Valuations for Buying a Business- What Information Do I Need?

When you conducted your review of the business while in the Finding a Business stage, you gathered enough information to at least perform preliminary appraisals for buying a business.

Ultimately, 3 years worth of Profit & Loss (P&L) reports would be ideal, but that will be rare at this stage. If you happened to get it during your initial review of the business, that's great. But if not, a general P&L from the previous year or the last 12 months will do. This is the typical information you will get from a business profile that goes along with the business listing.

Further information from the review that will be of use are things such as:

•how long the business has been operating,
•how long the current owner has been operating the business,
•how important the seller is to the business,
•how difficult it is to enter this type of business,
•is there a lot of competition in the area,
•are customers often repeat/contract based or one shot deals,
•are hard assets (equipment) in good working order,
•what reasons are the owner selling for, etc.

Now all you need to do is to find the proper mulipliers to do the initial valuation.

I recommend using the rules of thumb that involve owner discretionary cash flow (ODCF) multipliers. They are the most accurate value indicators for most, but not all, small businesses and provide different multipliers for different industries.

In general the multipliers will be in the range of 1.75 to 3.5 times the ODCF. Most won't be less but some can be more depending on the industry and other positive factors such as location, time in business and so on.

This will at least get you an idea of what the business is really worth. I would recommend getting help with this as it is a very important piece to the puzzle. You can find do it yourself resources here or get some consulting help here.


Best of luck in your business buying success-

The Business Buying Guru