Happy Wednesday!
Yesterday I covered the first two steps of my deal screening process:
- The margin check
- The three fundamentals every business needs to clear
Today, let’s talk about how to quickly figure out whether the asking price is even in the right neighborhood.
Aisha left her corporate job at Amazon and bought a $2.4M CPA firm with her husband Mark while he kept his full-time W2 job.
They went from looking at big cities where brokers wouldn’t even return their calls to finding a small-town Indiana firm in an Amish community with sticky clients and clean books.
They closed on New Year’s Eve and are projected to make $500K+ annually by year two after transition costs.
They’re not CPAs, but brought Mark’s dad (who is a CPA) on board to help the seller feel comfortable, and it worked.
👉 Want to buy your first business and learn everything you need to have a successful acquisition? Book a call with our team here.
Why this matters before due diligence
A lot of buyers skip the valuation check early on and dive straight into learning about the business.
Then they spend weeks reviewing financials and talking to the seller, only to realize the seller’s price expectations are nowhere near what the business can actually support.
Running a simple valuation check upfront costs you five minutes, and is well worth your time.
(In Acquisition Ace, members learn how to run this valuation math quickly and how to use it in early conversations with sellers so they’re negotiating from an informed position from the start. To see how our community can help give you an advantage in landing your first acquisition, book a call with our team here.)
How to run it
Small businesses in the lower middle market typically trade at two to four times annual cash flow.
Where a specific business falls in that range depends primarily on how dependent it is on the owner.
If the owner is working full-time in the business and things wouldn’t run without them, you’re looking at the lower end of that range, closer to 2x.
The owner dependency is a real risk that the buyer has to price in.
If there’s a management team in place and the owner is largely hands-off, the multiple can stretch toward 4x.
That structure is more transferable, and buyers will pay for the stability that comes with it.
Take the average annual cash flow over the last three years, apply the appropriate multiple, and compare it to the asking price.
If the asking price is above 4x and the seller can’t clearly articulate what justifies the premium, that’s usually a signal to move on.
What to do with the number
If the asking price is within range or slightly above with a clear reason - strong growth trends, a sticky customer base, a recent infrastructure investment - that’s worth a conversation.
If it’s significantly above what the math supports and the seller can’t explain why, that’s information.
It doesn’t always mean walk away immediately, but it does mean you need to understand the gap before investing serious time.
Tomorrow, I’ll cover the quick red flag scan that ends most conversations before they start, and how to put the whole framework together into a decision.
If you’d like help building this kind of structured evaluation habit into your search process, the Acquisition Ace community is a great place to develop it.
If you’d like to talk to hear how it can help you…
