Business valuation for buying a business
An independent valuation before you sign tells you what the business is worth on its actual maintainable earnings, not on the seller’s add-backs. It is the cheapest part of any acquisition and the only part written for you rather than for the vendor.
Buyers are routinely presented with an information memorandum containing an earnings figure that has been normalised generously and a multiple selected optimistically. Testing both, before the contract rather than during due diligence, is what a purchaser valuation is for.
The brief
Who reads it, and what it has to satisfy
The purpose sets the standard of value, the level of documentation and the person the report has to convince. Getting that wrong is the most common reason a valuation is rejected.
You and your funder. A lender will frequently require an independent valuation before approving acquisition finance.
Fair market value, with a separate view on the specific value to you if synergies exist.
Current, based on the most recent completed accounts and year-to-date trading.
What the report must contain for this purpose
- An independent test of the vendor’s claimed add-backs, item by item
- Maintainable earnings assessed on evidence rather than on the vendor’s presentation
- A multiple derived from market evidence for a business of this risk profile
- Customer concentration, owner dependence and contract transferability assessed explicitly
- The asset schedule verified rather than accepted from the depreciation register
- The risks that should be priced into the offer or covered by warranties
Sequence
Where the valuation sits in an acquisition
The most useful sequence puts the valuation before the contract, or makes the contract conditional on it.
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01
Before you offer
A short-form indicative assessment on the information provided, in three to five business days, so your offer is anchored to something defensible.
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02
Contract subject to valuation
Where you have moved quickly, make the contract conditional on a satisfactory independent valuation and use the condition period for the full report.
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03
During due diligence
The valuation runs alongside your accountant’s financial due diligence and your lawyer’s legal review, testing earnings while they test records and contracts.
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04
Before settlement
The findings inform the final price, the structure, the warranties you require and the working capital adjustment at completion.
Where it goes wrong
What buyers get caught by
Every one of these is visible before settlement if someone independent is looking for it.
The arithmetic of getting it wrong
An overstated add-back of $80,000 in a business priced at 3.5× costs you $280,000. A valuation is a small fraction of that, and it is the only advice in the transaction prepared for the buyer rather than by or for the vendor.
- Accepting the vendor’s add-backs Vendor normalisations routinely include an owner’s salary replaced at below-market rates, personal costs counted twice, and one-off items that recur annually. Each inflated dollar of EBITDA is multiplied by three or four in the price.
- Paying for personal goodwill In owner-operated businesses much of the goodwill leaves with the owner. If clients deal with a person rather than a business, you are buying a customer list that may not renew.
- Missing customer concentration One customer at 30 per cent or more of revenue is a risk that should reduce the price or be covered by a retention mechanism. It is frequently disclosed only in a schedule nobody reads.
- Taking the asset register at face value Written-down book values bear little relation to market, in either direction, and equipment on the register is frequently financed or supplier-owned.
- Ignoring the working capital position A business handed over with debtors collected and creditors stretched needs cash on day one. The completion adjustment should be set against a normalised working capital level, not a point-in-time balance.
What we need
Documents for this engagement
Whatever the vendor has provided, plus the items below. Where the vendor will not provide something, that in itself is a finding.
Open the standard checklist →- Information memorandum or listing The vendor’s presentation, tested rather than accepted
- Financial statements — three years For every entity in the structure
- Vendor add-back schedule With the ledger detail supporting each item
- Customer and revenue analysis Top customers by share, contract terms and tenure
- Lease, licences and key contracts Including assignment and change-of-control clauses
- Asset register and finance schedules What is owned outright and what is encumbered
Before, or in parallel. A valuation before you commit anchors your offer and identifies what due diligence should look at hardest. Running it after you have already agreed a price limits it to confirming or embarrassing a decision you have made. Where you must move quickly, make the contract conditional on a satisfactory valuation.
Treat it as a starting point, not evidence. A valuation commissioned by the vendor was prepared on the vendor’s instructions and information. Even where it is competently done, it answers the vendor’s question. Ours answers yours, and it tests the assumptions the vendor’s report relies on.
Usually yes, with the lender named as a party entitled to rely on it. Lenders want to see maintainable earnings tested independently, the asset backing assessed, and serviceability supported. Tell us at the outset who will rely on the report so it is scoped correctly.
Fair market value assumes a hypothetical willing buyer. Special or strategic value reflects what a specific buyer gains — synergies, removing a competitor, an existing customer base. We can assess both, and knowing the difference tells you exactly how much of your synergy you would be handing to the vendor.
A short-form indicative assessment in three to five business days, which is usually enough to support or reset an offer. A formal report is ten to fifteen business days from receiving complete information. Where you are inside a condition period, tell us the date and we will schedule backwards from it.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
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Test the number before you sign it.
A free 15-minute scoping call, then a fixed fee in writing. No obligation, and nothing you send leaves our office.
1300 778 033