If you are thinking about buying a company, one of the first things you will need to work out is how to value a business to buy.
We regularly see buyers fall into two traps. Either they rely too heavily on the seller’s price, or they rush to a valuation before properly understanding the business. Both can lead to expensive mistakes.
If you’re valuing a business to buy, there’s a lot to consider. What is the potential risk? Future returns? Nobody has a crystal ball but you can still make an educated decision on how much you think a business is potentially worth. Read on for our best tips for valuing your next business purchase.
Do Not Rely on The Seller’s Number
Sellers will usually have a price in mind. That price may be sensible, OR it could be completely unrealistic.
Either way, you should treat it as a starting point, but you still need to do your own investigation. Sellers price from their own perspective. Buyers need to price from theirs.
Your question should not be “Is this business worth that much?” It should be “Does this price make sense for me, given the risk I am taking and the return I need?” Those are very different questions.
This is why we can’t emphasise enough how important it is to get independent financial input early on. You need advice that focuses on YOUR position as a buyer, which will naturally be quite different from the seller’s.
Look At the Business Through a Buyer’s Lens
When thinking about how to value a business to buy, you should focus on what you can rely on after completion.
The following data points are what you need to really care about:
- Profits that repeat (try not to get blown away by a big one-off quarter)
- Cash flow and working capital needs
- Customer relationships and how stable they are
- How much the business depends on the current owner
- The quality and consistency of financial information
If the business relies heavily on the seller’s personal relationships, skills or reputation, that affects value. If financial records are unclear or inconsistent, that increases risk. Risk and value always move in opposite directions.
Future Growth Needs Hard Evidence
Sellers often talk about future growth. Sometimes they are right, but sometimes… they are being deluded.
As a buyer, you should be cautious. Unless growth is already supported by contracts, order books, data or systems, it is usually safer to discount it. You are paying for what exists today, not what might exist later.
This does not mean future growth has no value. It means you should not pay for it upfront without protection. This is where an earn-out comes into play. An earn-out links part of the price to something measurable after the sale completes. That could be revenue, profit, customer renewals or something more specific to your business, such as the rollout of a particular product or contract.
Valuation Depends on You as Much as The Business
There is no single correct answer to how to value a business to buy. Value depends as much on you as it does on the target company.
A business that looks attractive to one buyer may feel risky to another. Your experience, resources, appetite for risk and reasons for buying all matter. A first-time buyer will value certainty very differently to a trade buyer with systems already in place.
This is why experienced accountants and financial advisers can help you work through what matters in your situation and not just what looks good on paper. They help you understand where the business fits your strategy, and where the pressure points sit if things do not go to plan. Not all accountants and professional advisors are suited to this task. If your adviser has never a business sale or purchase, their input may be limited. At JPP Law, we often introduce clients to accountants and financial advisers who deal with transactions regularly and understand how buyers and sellers think. If you would like an introduction to a specialist accountant please email [email protected].
Be Honest About Risk
Every business has risk. The question is whether the price reflects it.
Common risks include customer concentration, informal agreements, undocumented intellectual property, under-investment in systems, or key staff with no long-term incentives. These issues do not always kill deals, but they should affect value.
If you ignore risk at the valuation stage, it tends to reappear later during due diligence or negotiation. That can lead to deals falling apart.
It is far better to factor risk in early and price accordingly.
Use Structure to Protect Yourself as a Buyer
When you are buying a business, uncertainty is unavoidable. The question is how much of that uncertainty you are willing to take on personally.
Rather than stretching on headline price, buyers often use structure to protect themselves. Deferred payments, earn-outs and seller finance can shift some risk back to the seller, especially where future performance is uncertain or the business is heavily owner-led.
These tools are useful, but they are not shortcuts. Poorly thought-through structures can create tension, disputes and years of distraction after completion. You should never agree them just to “get the deal done”. In many cases, a lower upfront price with clean terms gives you more certainty and less stress than a higher figure tied to conditions you cannot fully control.
Get Legal Input!
While accountants focus on numbers, legal advice plays an important role in valuation.
Think about how many legal aspects can affect what a business is worth to you in practice – the way liabilities are allocated, the scope of warranties, the strength of contractual protections, etc. A business priced attractively can become expensive if there are too many legal risks.
Legal advice helps you understand the difference between the headline price and real exposure.
How JPP Law Can Help
JPP Law advises buyers across England and Wales on business acquisitions. We regularly work alongside accountants and financial advisers to help clients value businesses sensibly and avoid common mistakes.
If you are thinking about buying a business and want to sense-check valuation, risk, or deal structure, we can help. We can also introduce accountants and financial advisers with the right experience if needed.
To speak to a solicitor or request an introduction, book an introductory call with one of our commercial solicitors.
