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Unconsummated Transaction is Not An Indication of Value

Updated: Dec 5, 2023

Most business owners continuously ponder the value of their investment. Few understand, or consider common deal structure and terms, but they know multiples of earnings which, of course, allows them to apply it to their own business (to obtain an indication of value). We'll defer an explanation of types of earnings to a later article and drill down here on just one narrow point: Offers for purchase and unconsummated transactions are spurious indications of value.


Talk is cheap. There is a lot of BS in the business world. Many a buyer are over their head and have little idea what is or would be a fair price and what type of deal they can close. After all, the buyer must come up with the total purchase price using just three sources: equity, bank debt, and seller financing.


When negotiating a deal, the buyer must estimate the amount he is willing and able to borrow and the amount of equity he has or can obtain. Some are more skilled and realistic at this than others. Anything - when it comes to the purchase price of a business - is NOT possible. The bucket must be filled from just capital sources, and there is always a limit to each.


A business purchase-sale deal that does not close is not an indication of value. It is the same as with real property. Only completed real estate transactions become comparable sales.


Now, if one wishes to dream, or use gossip, offers, or "I had a deal for x" (but it did not close) as indications of value, so be it. For me, I feel more comfortable with my financial feet on the terra firma.


 

Please, share your thoughts and perspectives via the comment section at the bottom of the page.


David Perkins is a mergers and acquisitions and business valuation expert, business owner and investor, and an award-winning author. Check him out on LinkedIn. Send him a note via David@AcqAdv.com or through our contact page.


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