Business acquisition valuation for a buyer’s decision

Separate the price question from the funding question

The asking price is only one part of an acquisition decision. A buyer also needs to understand transaction costs, debt repayment, working capital, investment requirements and the cash available after completion. A valuation can inform the decision, but financing feasibility requires its own cash flow analysis.

Ask what normal trading looks like

Reconcile annual accounts to recent management results. Examine revenue cut-off, customer concentration, owner involvement and unusual expenditure. Challenge whether an earnings adjustment represents a genuine future saving or simply transfers a cost to the buyer.

Illustrative cash requirement

A £900,000 equity purchase with £50,000 of transaction and initial integration costs and £100,000 of additional working capital requires £1.05 million before considering the funding structure. This is a funding illustration, not a value conclusion. Avoid treating money required to operate the target as though it were already covered by the headline price.

Value assumptions are not due diligence findings

A valuation may rely on information provided and on assumptions that require separate investigation. Financial, legal, tax and commercial due diligence examine different risks. Agree whether your instruction is a valuation, a review of an asking price or a broader transaction support brief.

Decide what would change your view

Useful analysis identifies the sensitive assumptions: a major customer leaving, slower collection, a replacement manager or overdue capital expenditure. Test these before negotiation, and keep buyer-specific synergies separate from the target’s existing performance.

Compare value with the full acquisition funding need

A valuation and a funding plan answer different questions. Reconcile the proposed share price, debt settlement, fees, required operating cash and any agreed working capital adjustment. Do not assume the target’s bank balance is freely available to finance completion.

In a hypothetical transaction, an £800,000 share price plus £60,000 costs and £140,000 additional operating cash requires £1 million before other relevant items. Funding only the share price leaves a £200,000 gap in this simplified illustration. The actual funds flow follows the transaction terms and professional advice.

Check whether the owner’s role must be replaced and whether the earnings forecast includes integration, investment and financing commitments. A downside should connect weaker trading with the costs that remain. Read value versus affordability and agree due diligence separately from the valuation scope.

Further questions