The valuation math that tells me if a deal is worth pursuing

Happy Wednesday!

Yesterday I covered the first two steps of my deal screening process: the margin check and the dealbreaker scan.

Today I want to cover the third: the quick valuation math I run on every business before deciding it deserves deeper attention.

Kristie was a full-time photographer who didn't want to spend another 13 years building a second business from scratch.

So she bought a drop-in daycare with two locations for $485K using a HELOC, putting just $35K out of pocket.

The business was doing $225K in verifiable cash flow with a team already in place, and she kept her photography business running while the daycare operates with minimal involvement from her.

She’s now making over $100K annually from the daycare while working just a few hours per week, and didn’t have to start from zero.

👉 Ready to get the roadmap to buying your first cash-flowing business? Book a call with our team here.

Why valuation matters at the screening stage

A lot of buyers skip this step early on.

They figure they’ll get to the numbers eventually, during due diligence or when they’re making an offer.

But spending weeks on a business only to discover the seller’s price expectations are wildly out of range is a painful and avoidable waste of time.

A simple calculation in the first 30 minutes tells you whether you and the seller are even in the same conversation before you invest anything further.

How to run the math

Take the average annual cash flow over the last three years.

Using a three-year average is important, because it smooths out outlier years and gives you a more realistic picture of what the business actually produces consistently.

Then apply a multiple based on how owner-dependent the business is.

If the owner is working full-time in daily operations and the business can’t function without them, you’re looking at a 2-2.5x multiple.

The owner dependency is a real risk factor, and the multiple reflects that.

(Acquisition Ace members learn how to run this valuation math accurately and how to use it in early seller conversations to set realistic expectations. To learn more about how our community can benefit you in your search to acquire your first business, book a call with our team here.)

If there’s a general manager running daily operations and the owner is largely hands-off - checking in periodically but not essential to the day-to-day - the multiple moves toward 3-4x.

That structure is significantly more transferable, and the market prices it accordingly.

What to do with the number

Once you have your estimated fair value range, compare it to the asking price.

If the asking price is within range or slightly above with a clear justification, that’s worth a conversation.

If it’s significantly above what the math supports and the seller can’t explain why, that’s useful information.

It doesn't always mean the deal is dead.

Sometimes sellers are testing the market, and there is room to negotiate.

But it does mean you shouldn’t invest serious time until you understand where that gap is coming from.

This math won’t give you a final, precise valuation, but you will get a fast, reliable signal on whether the deal is worth pursuing.

Tomorrow, I’ll cover the final piece of the pre-screening process - the three fundamental characteristics I verify on every business before going further.

If you’d like to start applying a structured approach like this to your own search, that’s just one of the things the Acquisition Ace community can help with.

To see if it’s the right fit for you…

👉 Book a call with my team here and let’s talk.