Stop pretending valuations mean anything

⏱️ Read time: 4 minutes

🔍 Deals analyzed: 1 (but it’s a banger)

💣 Knowledge bombs: 3

Want to hear something wild? I bought a business where the broker's valuation said $4M and the bank's said $3.5M. Neither one bothered to dig into the working capital.

Real quick! Working capital is the money that's already in the business for day-to-day operations. This typically includes cash in the bank, inventory, and money customers owe you, minus what you owe others. When you buy a business with strong working capital, you're not just getting the business itself, you might also be getting this extra pot of money that keeps the operation running smoothly.

I walked away with over $2M in working capital in the deal.

Let me show you what actually matters.

THE REAL DEAL: Two Valuations Zero Common Sense

So picture this. I'm buying this business and everyone's waving their valuation reports around like they mean something.

The broker shows up first "Here's your $4M valuation and don't worry we included working capital!" Cool cool.

Then the bank wants their own valuation. Fair enough. Their guys come back with $3.5M. But here's the weird part they never even asked about working capital… it didn't even come up in conversation.

Meanwhile I'm actually looking at the business and seeing over $2M in working capital that we can negotiate with. That's real money just sitting there that these "experts" either misvalued or straight up ignored.

Let me tell you what's actually going on here.

1. These valuation folks are checking boxes, not the business

2. They're missing millions in plain sight

3. Nobody's actually digging into what you're really buying

Real talk? If your valuation firm isn't asking about working capital they're not doing their job. Period.

DEAL DETECTIVE:

The Million Dollar Miss

What The Reports Say

• "Trust us we're professionals"

• "We did all the proper analysis"

• "These numbers are solid"

What They’re Missing

• Millions in working capital

• Basic business knowledge

• Reality of what you're buying

While these firms were busy making pretty charts I found $2M+ in working capital to negotiate with. Tell me again how valuable those reports were?

VALUE VAULT: Forget Valuations, Look at What Actually Matters

Valuations aren't worth the paper they're printed on.

Here's what does matter:

1. Your value creation plan. What are YOU going to do with this business? That matters way more than what some valuation expert thinks it's worth today.

2. Debt Service Coverage Ratio (DSCR). Quick primer here if you're new DSCR is just your free cash flow divided by your total debt payments. It tells you if the business can actually pay its loans and still leave you money to live. Target a minimum 1.50x DSCR. That's bare minimum (for me). I won't touch a deal with 1.25x DSCR…too much headache.

Let me be crystal clear. Don't ever buy a business just because some valuation report says it's worth X. Buy it because you know exactly how you'll create value AND you've got enough cash flow to sleep at night while you execute that plan.

Stay skeptical friends,

kinza

p.s. Got a friend trusting valuation reports blindly? Do them a solid and forward this. Their bank account will thank you.

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