The Successful Business Acquisition Process – Steps #10– Letter of intent and formal due diligence & #11-Valuing and pricing the company

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Letter of intent and formal due diligence

This chapter introduces some of the basic concepts of valuation of the company.  Although four basic approaches, the profitability method, the asset method, historic cash flow and discounted cash flow, are all described, the discounted cash flow method is considered the most accurate valuation of the company.  However, a comparison of values from different methods can provide useful insights, especially in the early stages of valuation of the business.

This chapter also points out the distinction between value and price.  The value is the worth of the company as will be operated by the buyer. The price is the amount you wish to pay for it.  The synergy you can realize from the sale, the motivation of the seller, and the projected growth of the industry, and the type of financing are just a few of the factors you might consider in negotiating the final price.

Valuing and pricing the company

This chapter introduces some of the basic concepts of valuation of the company.  Although four basic approaches, the profitability method, the asset method, historic cash flow and discounted cash flow, are all described, the discounted cash flow method is considered the most accurate valuation of the company.  However, a comparison of values from different methods can provide useful insights, especially in the early stages of valuation of the business.

This chapter also points out the distinction between value and price.  The value is the worth of the company as will be operated by the buyer. The price is the amount you wish to pay for it.  The synergy you can realize from the sale, the motivation of the seller, and the projected growth of the industry, and the type of financing are just a few of the factors you might consider in negotiating the final price.

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These articles are an overview of steps 10 & 11  that are explained in further detail in “How to Acquire the Right Business” by John Psarouthakis and Lorraine Uhlaner; Published by Xlibris, 2009. This book covers the 15  key steps involved in the complex and demanding process of buying the right business. It includes the search, selection, evaluation, pricing, negotiation, closing and managing the start of an acquired business. Buy this book.

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