If you have just decided to start the process of buying your

first company or if you are a seasoned mergers and acquisitions

professional, you as a business buyer, need to utilize a

disciplined, structured approach to purchase the best business

acquisition possible. This article will give you a shortcut to

incorporating most of the elements you must have to

systematically qualify and “bias” the business purchase

negotiations in your favor with the business seller.

Buying a business is a “one off”, iterative process in that each

purchase opportunity is unique and different with regard to its

sense of urgency from the seller’s perspective. However, as

each purchase situation is different, if you do many business

acquisitions over time you quickly see that there are

fundamental elements to the location, qualification and

negotiation processes of buying a business, that once learned,

can be leveraged repeatedly from one business purchase

opportunity to another.

Four Steps to Business Valuation and Purchase/ Sale Analysis

With the intent to be brief yet adequately cover all the

important elements of the business appraisal and deal structure

steps of buying a business, we will only focus on these

elements within the typical business purchase process:

1) Company Analysis Steps:

Review all information obtained from the seller as solicited

in the buyer’s Letter of Intent or “LOI”:

All financials, leases, insurance policies, tax returns,

contracts, environmental reports, legal documents,

retirement programs, inventory counts, patents, licenses,

policies, customer lists

Adjust historical financial statements provided by the seller

to represent profits that reflect actual business

performance and exhibit correct asset and liability values

Compare adjusted financials to key, like industry,

performance metrics

Evaluate all non-financial elements of the company Customer

sales mix, customer retention rates, customer locations,

employee counts and performance metrics, landlord contracts

and lease provisions, bank/financing relationships, key

suppliers and critical product or service content and

 warranty issues…to name a few

Prepare a “zero-based” budget for the next 3 financial terms,

including anticipated monthly cash flows for the business

including acquisition debt service requirements

2) Business Valuation Steps:

Calculate an asset based approach to business value

determination

Calculate a profit based approach to business value

determination: This will require use of capitalization and a

wide variety of Discount rate elements based on: Projected

real returns with inflation assumptions Industry growth

factors and risk influences Management additions or

deletions and compensation changes A wide variety of non-

financial factors and assumptions

Calculate a cost to replace company assets approach to

business value Determination

Weight each of the business valuation methods for relevancy

based on historical business performance, future performance

assumptions, various non-financial aspects of the business,

the anticipated final terms of business purchase, the

financial and human resources that will be available to take

the company where you want it to go

3) Business Purchase and Sale Analysis:

Select specific assets and liabilities to be purchased

Identify a $ allocation to each asset and liability you

select

Analyze various means to purchase current debt obligations,

consider seller contingencies

Rank each means to purchase current debt obligations and

select the best for your constraints

“Run the numbers”: put together a monthly and annual post

sale cash flow analysis for both the business buyer and the

seller. Emphasize positive cash flows for eventual seller

presentation.

Test your proforma financials for possible seller “numerical

exaggerations” or mistakes

4) Communicate Findings and Analysis to Seller:

Your primary objective is to justify your desired company

purchase terms in a professional manner, to maximize your

credibility and foster constructive dialog with the seller

All findings and analysis should be proof read before

presented to the seller

All documentation should be organized in a professional,

somewhat formal Format

The information should be introduced as a “starting point”, a

basis of further discussion

Your data should include numeric analysis responses to

anticipated seller Positions

Consideration should be made to have a professional, “non-

buyer” present the findings

All documentation should be also used for future lender, key

supplier, landlord and employee presentations.

Each presentation customized or fortified for the targeted

audience.

  (This step is where all your purchase “weapons”

          are shown, but not necessarily used)

Purchasing a viable business can be a complex and emotional

experience for both the business buyer and the seller. The

business seller often has much of their life and money wrapped

up in the enterprise and is looking for the long awaited “pay

day”, while the buyer typically has an intense “opportunistic”

disposition fueled by a “seek and conquer” methodology.

The more a business buyer can take the emotion out of the

purchase negotiation with effective development and

professional presentation of key financial and non-financial

justification content, the greater his probability of reaching

HIS desired business purchase terms with the business seller.

The business analysis and valuation steps in the business

buying process are key components to reaching this ultimate

objective.

About the Author:

Mark Smock is President of www.business-buyer-directory.com,

the FIRST international business buyer directory of its kind.

Business Buyer Directory provides a non-traditional means for

proactive business buyers to locate businesses for sale

worldwide that meet their exact registered purchase criteria.

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