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.
Steps to Evaluate a Partial Acquisition
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.
Friction with the Seller
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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David C. Barnett
