Price versus terms
A higher nominal price with seller financing, earn-outs or favourable working-capital terms can have different economics from an all-cash offer.
Buy a business
How much should I pay for a business?
A defensible purchase price starts with sustainable cash flow after realistic management costs, working capital, capital spending and taxes. The final amount also depends on risk, growth, financing and deal terms.
Short answerNormalize the earnings, convert them to cash available to the buyer, apply a valuation method appropriate to the business, then bridge enterprise value to the actual equity purchase price. Finally, test whether the financed deal still works under a downside case.
Build value from the buyer's economics
- Normalize revenue and expenses. Remove unsupported add-backs and replace the seller's role at market cost.
- Estimate maintainable cash flow. Include normal working capital, capital expenditure and tax.
- Assess risk and transferability. Customer concentration, owner dependency and weak systems affect value.
- Apply the valuation framework. Use earnings multiples, discounted cash flow or asset value where appropriate.
- Bridge to equity price. Adjust for cash, debt, working capital and debt-like items.
Illustrative price bridge
| Maintainable EBITDA | $500,000 |
| Illustrative multiple | 4.0× |
| Enterprise value | $2,000,000 |
| Less debt / adjustments | ($300,000) |
| Illustrative equity value | $1,700,000 |
Not a valuation opinion. Multiples and adjustments vary materially.
The asking price is only one version of the deal.
Value versus affordability
A business may be worth the asking price but still be unaffordable if debt service and post-close investment consume too much cash.
Value versus risk
Concentrated customers, undocumented processes, deferred spending and owner dependence should be reflected in price or conditions.
Verify before negotiating the final price
Use the financial due diligence checklist to test earnings, working capital and liabilities. Price should be revised when evidence changes the maintainable cash flow or risk.
Model the financing at the same time
Test buyer equity, lender debt, seller financing, debt service and the first 100 days of cash. A price that leaves no liquidity after closing can turn a good company into a bad investment.