How to calculate exactly how much a business is worth

This email is Part 2 of a short series covering AI prompts you can copy and paste to find and analyze your first business acquisition.

You can read the previous part here:

• Part 1

On Tuesday, I shared the “Deal Hunter” prompt I use to find acquisition opportunities in under 10 minutes.

But finding deals is only half the battle.

Once you've identified a promising business, you need to analyze whether it's actually worth buying, and at what price.

This used to be the most time-consuming part of the entire process.

I’d spend 45 minutes in spreadsheets calculating weighted cash flows, determining appropriate multiples, and identifying red flags.

Now AI does all of that in 2 minutes, and it catches mistakes I'd typically make when working manually.

Here’s how it works:

My ultimate “Financial Analyzer” prompt:

"You're an expert in small business valuation using my specific methodology. I'm analyzing a [business type] with these financials: [insert the actual numbers].

Key context: small businesses typically sell for 2 to 4x cash flow with the multiple determined by management structure and growth trends. Owner-operated businesses get 2 to 2.5x. Businesses with general managers get 3 to 4x.

I need you to:

1. Calculate weighted average cash flow over 3 years, giving 50% weight to the most recent year, 30% to the second year, and 20% to the third year.

2. Determine appropriate valuation multiple based on management structure and whether owner works in versus on the business.

3. Calculate fair market value range.

4. Recommend maximum offer price. I typically start 15 to 20% below fair value.

5. Identify red flags like customer concentration over 20%, declining cash flow trends, or heavy owner involvement that would lower the multiple."

Here's why I like this so much:

AI applies the exact valuation methodology I’ve always used, but does the calculations instantly without missing any factors.

It considers declining cash flow trends, owner involvement levels, and industry-specific risk factors that I might overlook when rushing through analysis.

The weighted average calculation is particularly important.

It gives more emphasis to recent performance while still considering historical trends.

What the analysis includes:

Instead of just getting a number, you get education on how that answer was derived.

AI shows its work and explains what factors it considered, what risks it identified, and why it chose a specific multiple.

It can help you learn how to think about business valuation using proven frameworks, not just generic advice.

Here’s a real example…

When I analyzed that Manatee County HVAC business from Tuesday’s newsletter, AI calculated:

• Weighted average cash flow based on 3 years of performance

• Applied a 3x multiple due to existing management structure

• Identified the fair market value range

• Recommended a maximum offer price 18% below asking

• Flagged potential concerns about seasonal revenue fluctuations

This analysis would have taken me nearly an hour to complete manually, but AI delivered it in under 2 minutes with more thorough consideration of risk factors.

Your competitive advantage

Most people make offers based on gut feeling or simple revenue multiples.

But when you understand the true cash flow trends, management risks, and appropriate valuation ranges, you can make offers that actually get accepted.

You’ll know exactly when to walk away from overpriced deals and when you've found genuine opportunities.

And the best part? You can run this analysis on multiple businesses in the time it used to take to evaluate just one.

Just remember:

AI will help with the math. But you still need to verify the underlying financials and understand what’s driving the business performance.

Use these calculations as your starting point, not your final decision.

Next week…

This is Part 2 of our 3-part AI series. In the third and final installment of this 3-part series, I’ll share my Deal Structure prompt that creates complete financing plans…

Including zero-down strategies with seller notes and investor partnerships.

On that note…

Any time I come across a potential acquisition opportunity that I think my subscribers might be interested in, I send out a broadcast with the details.

To opt in to receive those emails, just fill out this 2-minute survey:

👉 I want to buy (or invest as a silent partner into) a business

Or if you’re selling your business, tell me more about it below. We’ll reach out if we find a good fit.

👉 I want to sell a small business (and I’m actively looking for buyers)

Onward,

— Ben Kelly