As a business broker, I'm continually surprised by the number of seekers who don't use sound decision-making processes (and a healthy dose of common sense) when deciding whether to put in an IOI or LOI. Here are some key criteria to keep in mind, and I'm sure those who comment on this post will add others.
1, Do you have knowledge/skills in the target area? If not, you don't know what you don't know, so tread carefully!
2. Develop a financial model that answers the following questions under a range of assumptions.
a. What is the Net Present Value of my investment?
b. What is the Internal Rate of Return?
c. Can the operating revenue cover my debt service (or investor expectations of return)?
NPV is the financial gold standard, while IRR tells you how hard your money is working for you.
BUT, remember that all financial models are wrong, though some are useful.
Make sure you understand the parameters and limitations of your model.
3. Asset purchases and stock purchases differ fundamentally. Know and understand the differences!
4. Don't submit an insulting offer. There is nothing wrong with looking for a bargain, but if you wouldn't accept your offer if the positions were reversed, reconsider it.
5. Deals that make it through settlement tend to be deals where all of the stakeholders come out winners, or at least none of them are clear losers. The term "stakeholders" includes more than just buyer and seller.
6. Have people on your team who can help you, and know their skills and limitations too. I'm a financial modeling expert with an MSF, but not a tax attorney. Don't be upset if I refer you to someone who can help you better than I can.
Happy hunting!
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