Buying a business? Understand the value, the price and the cash you will need.

The seller’s guide price is the start of the analysis

An asking price may reflect an owner’s expectations, a broker’s marketing approach or a particular deal structure. It is not a substitute for understanding the business you would acquire. Ask what the quoted price includes: shares or assets, cash, debt, stock, premises and any deferred payment.

A buyer-side valuation can help you develop a reasoned view and identify assumptions to investigate. It does not replace legal due diligence, financial due diligence, financing advice or a review of the acquisition documents. Agree which work is included and where other advisers are needed.

Check whether the earnings survive the handover

Identify which activities the seller performs, which relationships depend on them and which costs will continue. Owner salary add-backs are particularly important. If the seller manages operations and wins customers, replacement may require more than a nominal director’s fee.

Compare annual accounts with recent management information, customer concentration, gross margins and cash receipts. Ask why performance has changed and whether a forecast relies on unsigned contracts or a new operating model. A valuation based on an optimistic earnings figure can look affordable until the business has to fund the transition.

Worked example: purchase price versus total funding

The example is not a recommended price, fee or financing plan. The £50,000 cash is reflected in the assumed share price; whether and when it is available to the buyer must be checked. Working capital adjustments, tax, restrictions and transaction terms can change the funds flow. Avoid deducting acquired cash twice or assuming the target can fund completion.

Test the offer under a downside case

Build a practical scenario around revenue, margin, customer retention, replacement management and working capital. Then examine cash available after tax, investment and financing payments. EBITDA alone does not establish debt affordability.

If the acquisition only works when every seller adjustment is accepted and all growth arrives immediately, investigate further. A lower price, different payment terms or more funding may change the risk, but none removes the need to understand the underlying business.

Test the handover plan before accepting the earnings case

Write down what the seller does in a normal week and what must happen on day one after completion. For each activity, identify who will do it, their capacity, the full cost and the evidence supporting the transition. A plan saying “the existing team will absorb it” needs the same scrutiny as a formal hiring assumption.

If the seller proposes a transition period, model the actual fee and what changes when it ends. Temporary support can assist a handover; it does not establish that a permanent operating capability already exists.

Define the working capital assumption before comparing offers

A buyer needs to understand the ordinary cash tied up in trading. Stock, debtor collection and supplier payments can change materially through a year. A single month-end balance may be a poor description of what the acquired business needs.

Review monthly patterns and ask the transaction advisers to define the items included and the reference level. The agreed treatment matters more than a generic label such as “normal working capital”. Avoid treating the same balance as both debt-like and working capital without a clear reconciliation. ICAEW’s completion mechanisms guideline explains the relationship between the headline value and these transaction adjustments.

Separate hypothetical illustration: if agreed target working capital is £120,000 and the measured amount on the agreed definition is £95,000, the shortfall is £25,000. A transaction using a pound-for-pound adjustment on that basis would reduce the equity price by £25,000. The actual mechanism is a negotiated contractual matter; this example does not establish the right target or treatment for another deal.

Use valuation findings to brief the next adviser

Turn each material uncertainty into a question for the right workstream: earnings support for financial due diligence, customer continuity for commercial review, and contract or ownership rights for legal advice. Record who is responsible and whether the answer is required before agreeing price or progressing the transaction.

Our hypothetical examples explain the questions, rather than recommend proceeding with an acquisition. The ICAEW financial due diligence overview provides further context on investigating the financial case behind a transaction.

What to send for an initial discussion

Start with the type of business, broad scale, whether you are buying shares or assets, the proposed timetable and the question you need answered. After a suitable confidentiality and engagement discussion, useful records may include the information memorandum, accounts, recent management figures, owner adjustments and draft commercial terms.

Do not send confidential seller documents through the enquiry form. If access is limited, explain what you have permission to share and what remains unavailable. The scope should reflect those limits.