**New Video Alert!
What’s the difference between an LOI, a term sheet, and an offer when buying a business?
If you’re trying to buy a small business, understanding how to structure your offer is critical.
In this video, I break down the key differences between these documents, what should be included, and how to avoid costly mistakes that can kill deals before they even get started.
Watch the video here: https://youtu.be/UAefk3FMTU8
Cheers
See you over on YouTube
David C Barnett
One of the biggest reasons business sales fail has nothing to do with profit—it’s a misunderstanding of working capital.
Many business owners believe that if their company is valued at a multiple of earnings, that number represents what they’ll walk away with. It doesn’t.
That number is enterprise value—the value of the cash flow assuming everything needed to run the business is included. https://youtu.be/on4RmO0egMM
Working capital includes cash, receivables, and inventory required to operate the business.
If a buyer has to inject additional money after the purchase to keep things running, their total investment increases—and the deal quickly stops making sense.
For example, a business priced at $900,000 may actually require $1.1M+ when working capital is added. Buyers will either lower their offer or walk away.
From a buyer’s perspective, working capital is no different than equipment. If a key asset is missing, they must replace it—and adjust the price accordingly.
This is where many sellers go wrong. They assume:
Cash is “theirs”
Receivables belong to them
Working capital is separate from the sale
In reality, it’s part of what makes the business function.
The root issue is often poor balance sheet management—too much inventory, slow collections, or excess cash tied up in operations.
To fix this:
Streamline inventory
Improve receivables collection
Reduce unnecessary capital needs
Most importantly, start early. Buyers rely on historical data, so improvements should be made well before going to market.
If you want to sell successfully, think like a buyer.
Ask yourself:
Would I pay this price and still earn a reasonable return after funding the business?
If the answer is no, the deal won’t work—no matter what a broker says.
Working capital is essential to business operations and must be included in the value buyers are paying for. If not properly managed, it will reduce offers or prevent a sale entirely.
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**New Video Alert!
Have you ever felt burned out running your business?
On this video the owner built a $3M/year company… and still wants out.
Would you sell and walk away with $800K?
Or try to fix the business and keep going?
Watch the video here: https://youtu.be/vHkMDaBWPxw
Cheers
See you over on YouTube
David C Barnett
When you're buying a part of a business, the numbers you get—financials, revenues, expenses—reflect the entire operation, not just the segment you're interested in. https://youtu.be/zrKQWzxN58w
So:
You don’t have clean, ready-made financials for the slice you're buying.
You need to reconstruct what that slice would look like if it stood on its own.
1. Start with Sales
Pull out the revenue attributable to the part of the business you're considering buying.
2. Estimate Cost of Goods Sold (COGS)
Determine whether you can get the same supplier discounts as the full business currently does. If the existing business got volume discounts, your COGS might actually be higher.
3. Forecast Overheads
This is where synergies get lost. Admin costs like payroll, accounting, or purchasing may have been shared. Now you’ll need your own setup, so costs go up.
4. Build a New, Hypothetical Income Statement
Using all the info above, you create a “what-if” income statement as if this were a standalone business.
5. Apply Valuation Techniques
Once you've got projected net income or cash flow, you:
Use a capitalization rate (e.g. 3x earnings), or
Use discounted cash flow (DCF) by projecting future cash flows and discounting them.
Here’s the kicker:
What it's worth to you may not match what the seller thinks it's worth.
Why? Because:
You may lose efficiency (higher overheads).
You might not be able to access the same discounts or resources.
You’re probably taking on more risk.
So your version of the business will likely be less profitable, which should lower its valuation from your point of view.
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Cheers, and see you next time!
David C. Barnett
In this conversation, I sit down with David C. Barnett — author, consultant, and one of the most trusted voices in buying and selling small businesses.
Buying a Business? What You NEED to Know First
New Livestream guest- Chris Papin (CPA & Attorney)
I’m happy to have Chris join me on a live broadcast.
Chris brings a unique perspective as both a CPA and a lawyer, helping small business owners navigate acquisitions, due diligence, and critical growth decisions.
Tune in as we discuss what buyers often miss, how deals really work, and why having the right advisors can make or break your next business move.
This is a ‘must see event’ for anyone thinking about buying a business, growing one, or preparing for a major transition.
Be sure to join live so that you can ask questions, replay will be available.
Set yourself a reminder on YouTube here: https://youtube.com/live/NY0GKSLJuc4
We’ll be going live Thursday April 02 at 2:35PM Atlantic Time and 1:35 PM Eastern Time
See you there!
David C Barnett
I'm officially endorsed by the robot mega-brain!!
