Why Evaluation Matters More Than Excitement
Most first-time buyers get excited about a listing before they understand the numbers. That is a recipe for overpaying, missing red flags, or buying a business that cannot service its own debt.
A structured evaluation process protects your capital and gives you leverage in negotiations. Here is how to approach it.
Step 1: Start With the Financial Statements
Request at least three years of profit and loss statements, tax returns, and a balance sheet. Compare the P&Ls to the tax returns. Discrepancies are common and always worth investigating.
Step 2: Understand Add-Backs
Sellers often present "adjusted" earnings that add back personal expenses, one-time costs, and discretionary spending. Not all add-backs are legitimate. Pressure-test each one and ask for documentation.
Step 3: Calculate Debt Service Coverage
If you plan to use SBA financing, the business needs to generate enough cash flow to cover the loan payment plus a margin of safety. A DSCR of 1.25x or better is typically required.
Step 4: Assess Operational Risk
Customer concentration, key-person dependency, lease terms, regulatory exposure, and supplier concentration are all risk factors that affect value and deal structure.
Step 5: Compare to Market Multiples
Look at comparable transactions in the same industry and revenue range. Multiples vary widely, so context matters more than averages.
The Bottom Line
Evaluation is not about finding reasons to say no. It is about understanding exactly what you are buying and at what price it makes sense.
Need help evaluating a deal?
Get a strategy session or deal review from a buyer-side business broker.