The Valuation Process
Recommended Terms & Price Justification
As part of the business valuation process, we will conduct an analysis on the most appropriate financial structure for a fair buy-sell arrangement between the subject company and a potential, qualified buyer. This empowers the existing business owner(s) in price and term negotiations to ensure they are financially protected, both short and long-term. In addition to suggested financial structures, the valuation package will include a Justification of Purchase test so that a seller can confidently stand their ground with prospective buyers.
Recommended Financial Terms
Once the fair market value has been determined (which consists of tangible and intangible assets) by our expert valuators, we will present a couple of recommendations to the business owner about how they could structure the sale of their business. The structure and financial terms of a business transfer will influence the actual purchase price agreed to by a seller and buyer. If an all cash buyout is required by the existing owner, then the business will sell for a lower price. If the existing owner is willing to offer seller financing as part of the transaction, they can expect a higher purchase price. Some of the variables we consider in presenting hypothetical financial structures include the amount of down payment, seller financing, commercial financing, etc. A simple rule of thumb is higher down payment, lower purchase price; lower down payment, higher purchase price. Variables that can influence this assumption include commercial financing, buyer motivations, synergistic opportunities, etc.
Savvy business buyers will conduct due diligence on their own. As part of the valuation package, a Justification of Purchase test is conducted and presented to support the value of the subject business. This test evaluates the pricing and terms, and determines if a buyer could afford to buy the company at that price, under those conditions. This process will find out if the owner's discretionary cash flow can support annual debt service, owner/manager salary, and capital expenditures with some cash flow remaining. It is an excellent source to defend the purchase price and justify the terms of the business acquisition.
To learn more about price justification in the business valuation process, please contact us today or call us at 877-VALU-BIZ.