The most important indicators in a business acquisition evaluation are revenue transferability (will customers stay when the owner changes), financial accuracy (are the numbers real and verifiable), and owner dependency (how much does the business depend on the specific person selling it). These three factors determine whether you are buying a business or buying a job.
Most buyers focus on financial metrics -- revenue, EBITDA, growth rate -- without adequately assessing whether those metrics are transferable. A business with strong financials but high owner dependency, concentrated customer relationships personal to the seller, or revenue from expiring contracts may not be worth what its financials suggest.
Before engaging formal due diligence, apply three filters: the transferability filter (will the revenue survive the ownership change), the accuracy filter (are the financials accurate and complete), and the dependency filter (how owner-dependent is the operation). A business that fails any of these filters requires significant renegotiation or should be passed.
Ask for a customer list with revenue by customer for the last three years. How concentrated is revenue? Are customer relationships personal to the seller? Are there contracts in place or is revenue month-to-month? Would the top five customers be willing to speak with you?
Do not rely on seller-provided P&L statements without verification. Request tax returns, bank statements, and accounts receivable aging. The gap between reported and verified financials is often significant.
How many days per week does the current owner work in the business? What would happen if the owner took 30 days off? Are there key employees who could leave with the seller?
There is always a reason a business is for sale. Sometimes it is positive (retirement, health, new opportunity). Sometimes it is a warning (revenue declining, market shrinking, major client loss pending). Understand the reason fully.
Your first offer is not a final offer. Structure it as contingent on due diligence findings. Reserve the right to renegotiate if material discrepancies are found during the due diligence period.
A thorough three-filter evaluation before formal due diligence eliminates most bad acquisitions before significant capital or professional fees are committed. Most experienced acquirers report that the businesses they passed on were more valuable lessons than the ones they bought.
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