How to Analyze a Small Business Deal

TL;DR: How Smart Buyers Analyze a Small Business Deal

1. Start With the Numbers That Actually Matter
   If the math doesn’t work, nothing else does.
   SDE is your real paycheck — not revenue — and every add-back must earn its keep.
   Margins tell you efficiency, not sales volume. High revenue with weak margins is a treadmill, not a business.
   Cash flow beats accounting profit. Always reconcile accrual numbers to bank deposits.
   Trends matter more than today’s number. Three years minimum. One “great” year means nothing.
   If the deal only works after optimistic assumptions, it doesn’t work.

2. Do the Dirty Work (This Is Where Bad Deals Die)
   This is where most buyers quit — and where professionals get paid.
   Match P&Ls → tax returns → bank statements. If they don’t reconcile, stop trusting the story.
   Audit working capital so you’re not buying a business that immediately needs a cash injection.
   Scrutinize add-backs line by line. Most are exaggerated, recurring, or flat-out fiction.
   Look for seller games: delayed expenses, pulled-forward revenue, magically “clean” recent months.
   Clean books don’t guarantee a good deal. Messy books almost guarantee a bad one.

3. Figure Out What It’s Actually Worth (Not What They’re Asking)
   Valuation is a range — not a number someone pulls from a listing site.
   SDE × industry multiple is a starting point, not a conclusion.
   Quality adjusts the multiple: owner dependency, customer concentration, systems, and growth history matter more than averages.
   Cross-check with asset value and reverse DCF math to sanity-check the price.
   Ignore “potential” unless it’s already proven. Buyers pay for results, not ideas.
   If the seller needs you to “unlock the upside” to justify the price, they already missed it.

4. Spot the Red Flags Early (Before You Waste Time or Money)
   Some risks can be priced. Others are deal killers.
   Owner-dependent operations mean you’re buying a job, not a business.
   Revenue spikes right before sale often signal manipulation, not momentum.
   Customer concentration, weak documentation, evasive answers, or burned-out staff rarely fix themselves.
   Shady add-backs and missing records are usually symptoms of deeper problems.
   The best deals feel boring. The worst ones come with great stories.

5. Negotiate Like a Professional, Not a Fan
   Emotion kills leverage. Data creates it.
   Anchor your offer to provable SDE and risk-adjusted multiples, not asking price.
   Use structure to bridge gaps: seller financing, earn-outs, holdbacks, and working capital adjustments.
   Know your BATNA before you negotiate — and be willing to walk.
   A deal you don’t close can still be a win if you avoided overpaying.
   Discipline is the real edge. Not cleverness.

What This Guide Will Help You Do

By the end of this article, you’ll know how to:

• Analyze a small business deal step by step
• Tell real income from dressed-up numbers
• Spot red flags before due diligence gets expensive
• Value a business with confidence
• Negotiate without getting emotionally hijacked

Start With the Numbers That Matter

Before you fall in love with the brand or “potential,” get intimate with the math.
If the numbers suck, no amount of vision will save you.

Here’s how experienced buyers break down a business fast — and what brokers conveniently gloss over.

The Core Metric: SDE (Seller’s Discretionary Earnings)

SDE is the total financial benefit the owner takes home — salary, perks, and add-backs.

This is the number buyers actually buy — because it represents what you get paid for owning the business.

What to check:

• Compare tax returns vs profit and loss statements
• Audit the add-backs line by line
• Analyze owner workload and replaceability
• Identify which expenses truly disappear when ownership changes

If SDE is $325K but the owner works 70 hours a week with no management team, that’s not income — that’s a hostage situation.

Common SDE Mistakes Buyers Make

• Treating all add-backs as legitimate
• Ignoring replacement labor costs
• Trusting broker-adjusted SDE without verification
• Assuming “one-time” expenses won’t repeat

If SDE collapses after you normalize it, the deal collapses with it.

Margin Check — Is It Efficient?

Margins reveal how well the business converts revenue into profit.

• Gross Margin = (Revenue – COGS) ÷ Revenue
• Net Margin = Net Profit ÷ Revenue

High revenue with weak margins isn’t scale — it’s friction.

Compare margins against industry benchmarks, not seller claims.
If gross margin is materially below peers, dig into pricing, labor, supplier terms, or waste.

Margin problems rarely fix themselves. They usually get worse.

Cash Flow Reality (Accrual Accounting Lies)

Accounting profit doesn’t pay the bills. Cash does.

Check:

• Accounts receivable aging
• Inventory build-up or depletion
• Owner draws vs reported income
• Timing gaps between revenue and cash collection

Always reconcile income statements to bank deposits.

If the cash isn’t there, the profit isn’t real.

Revenue Trends — Quality Beats Growth

Look at at least three years of revenue.

Ask:

• Is growth steady or volatile?
• Are there unexplained spikes or drops?
• Is revenue diversified or concentrated?

A single great year means nothing if the prior two were weak.

Ask yourself:
“How would I grow this business 20% next year?”

If the answer relies on hope, vibes, or vague marketing ideas — that’s a risk, not a plan.

Customer Concentration Risk

No customer should control the fate of your business.

As a rough guide:

• >30% from one customer = elevated risk
• >50% from one customer = deal-level problem

Customer concentration impacts valuation, financing, and your ability to sleep at night.

Quick Ratio & Debt Load

Liquidity matters more than sellers admit.

• Quick Ratio = (Cash + Accounts Receivable) ÷ Current Liabilities
  Aim for 1.0 or higher.

Also examine:

• Total debt obligations
• Balloon payments
• EIDL loans or pandemic-era deferrals
• Maxed-out lines of credit

Debt doesn’t kill deals.
Surprise debt does.

The Bottom Line on the Numbers

Strong deals share a pattern:

• Clean, provable SDE
• Healthy margins
• Predictable cash flow
• Stable revenue trends
• Manageable debt and liquidity

Weak deals hide behind:

• Adjusted numbers
• Aggressive add-backs
• “Temporary” problems
• Promised upside

If the numbers don’t work cleanly today, you don’t fix that with optimism.

Do the Dirty Work: Financial Due Diligence

This is where deals go to die — and where smart buyers make their money.
If you skip this, you’re not “moving fast.” You’re buying blind.

Step 1: Get the Docs (Non-Negotiable)

Ask for at least 3 full years (plus YTD) of:

• Profit & Loss statements (monthly, not just annual)
• Balance sheets
• Business tax returns (1120/1120S/1065) + K-1s if applicable
• Bank statements (all operating accounts)
• Payroll reports (by employee / by month)
• Merchant processor statements (Stripe/Square/CC) if relevant
• Loan statements + amortization schedules
• Sales by customer / service line / location (whatever drives revenue)
• A/R aging + A/P aging
• Inventory reports (if inventory is material)

If they can’t produce basics quickly, assume one of two things: they’re disorganized or hiding something. Neither is your problem.

Step 2: Audit the Add-Backs (This Is Where SDE Gets Bullshitted)

The broker’s SDE is usually “best case.” Your job is to find reliable SDE.

Simple rule:
If the expense would still exist under new ownership, it’s probably not a real add-back.

Fast Add-Back Smell Test

Ask “show me” questions:

• “Show me the invoice / contract / payment trail.”
• “Is this expense gone on Day 1 after close?”
• “Would a normal operator still need this?”
• “Was this claimed as a ‘one-time’ expense last year too?”

If an add-back can’t be proven in 60 seconds with a document, treat it as fiction until proven otherwise.

Step 3: P&L → Tax → Bank Match (Reality Check)

Cross-check:

• P&L revenue
• Tax return revenue
• Bank deposits

If they don’t line up, you need to understand why:

• Timing differences (accrual vs cash)
• Unreported cash sales
• Revenue booked that wasn’t collected
• Multiple entities / commingled accounts
• Straight-up misstatement

You don’t need perfect books. You need explainable books.

Step 4: Normalize Working Capital (So You Don’t Buy a Cash Crisis)

Working capital is where buyers get quietly wrecked after closing.

Check:

• A/R aging (how much is actually collectible?)
• A/P terms (are vendors about to squeeze you?)
• Inventory levels (hoarding vs stockouts vs obsolete junk)
• Deferred revenue (did customers already pay for work you’ll have to deliver?)
• Seasonality (are you buying right before the slow season?)

If the business needs constant cash just to operate, price and structure the deal like that’s true.

Step 5: Spot Seller Games (Common “Cosmetic Surgery” Before Sale)

Watch for patterns like:

• Delayed expenses (repairs, inventory, payroll, contractor bills) pushed into “after you buy it”
• Pulled-forward revenue (discounting, prepaid packages, aggressive promos) to juice recent months
• Inventory games (under-ordering to inflate cash, or over-ordering to hide shrinking demand)
• Sudden margin improvement with no operational explanation
• “Magically clean” recent months after years of mess

The last 90 days are the most lied-about period in the entire business.

Common Buyer Questions

Can I analyze a deal without tax returns?
You can screen it, but you shouldn’t trust it. Tax returns are the closest thing to “numbers they actually had to sign.”

How many years of financials do I need?
Three is the baseline. Five is better if the business is cyclical or had a “weird year” story.

What if the books are messy?
Messy can be fixable. Unexplainable is not. You’re looking for reconcilable reality, not perfection.

Valuation – What’s It Actually Worth?

Valuation isn’t a number. It’s a range shaped by risk.
Your job isn’t to accept the asking price — it’s to stress-test it from multiple angles.

SDE × Industry Multiple (Starting Point, Not the Answer)

This is the headline method — and the most abused.

The formula is simple. The judgment is not.

Rule of thumb (before risk adjustments):

• Low quality: 1.5–2x
• Solid operator business: 2.5–3x
• Growth + systems + stability: 3.5–4x+

If the seller is asking for a top-tier multiple, the business needs to earn it on fundamentals — not vibes.

Asset-Based Valuation (The Floor)

Use this method when:

• The business is asset-heavy
• Profit is weak, volatile, or unreliable
• You’re effectively buying equipment, inventory, or contracts — not cash flow

Formula:
Fair Value ≈ Tangible Assets – Liabilities

This approach ignores upside and focuses on what’s recoverable if things go sideways.

If the deal price is far above asset value with no reliable earnings, you’re speculating — not buying.

Reverse DCF Gut Check (Return Reality)

This isn’t a spreadsheet exercise. It’s a sanity check.

Formula:
Implied Value = SDE ÷ Target ROI

Example:

• $300K SDE ÷ 0.25 = $1.2M value (for a 25% return)

Ask yourself:

• Does the asking price clear my required return without heroics?
• Does this still work if growth stalls?
• Does it work after debt service and taxes?

If the math only works assuming perfect execution, it doesn’t work.

Valuation Reality Check

Smart buyers triangulate:

• Multiple math (market reality)
• Asset value (downside protection)
• Return math (personal economics)

When all three point to the same range, you’ve found fair value.
When they don’t, the price — or the deal — needs to move.

Red Flags You Can’t Ignore

Some risks can be priced.
Others should stop the deal cold.

These are the red flags that consistently turn “promising deals” into expensive lessons.

Owner = Business

If the owner is the top salesperson, lead operator, rainmaker, and decision bottleneck, you’re not buying a business — you’re buying a job.

Watch for:

• No documented processes or SOPs
• Customers who “only deal with the owner”
• Key relationships tied to personal trust, not contracts
• An owner who insists on long earn-outs just to keep revenue stable

If revenue walks out the door with the seller, the valuation should too.

Suspicious Add-Backs

Add-backs are where deals get dressed up for sale.

Major warning signs:

• Vague descriptions (“misc,” “owner adjustment,” “cleanup”)
• Add-backs that appear every year
• Expenses that clearly continue post-close
• Resistance when you ask for documentation

If SDE only works on paper, the deal only works on paper.

High Customer Concentration

Customer concentration amplifies risk faster than most buyers realize.

As a rule of thumb:

• Over 30% from one customer = elevated risk
• Over 50% from one customer = deal-level problem

Ask:

• How sticky is the relationship?
• Is there a long-term contract or just habit?
• What happens if pricing changes or the buyer churns?

Concentration hits valuation, financing, and your exit — all at once.

Revenue Spike Before Sale

Sudden growth right before listing deserves skepticism.

Common explanations that don’t hold up:

• “We finally focused on marketing”
• “A big customer came back”
• “This year is just different”

Look for:

• Discounting or prepaid deals
• Pulled-forward revenue
• Deferred expenses making margins look better

Real growth shows up gradually. Manufactured growth shows up suddenly.

No Online Presence (or a Weak One)

In most industries, no digital footprint equals hidden fragility.

Red flags include:

• No website or outdated site
• No Google reviews or review suppression
• No CRM, analytics, or lead tracking
• Reliance on word-of-mouth only

This doesn’t kill every deal — but it usually means growth will cost more and take longer than sellers admit.

Burned-Out or Thin Staff

People problems become buyer problems immediately after close.

Watch for:

• High turnover or key roles held by one person
• Underpaid staff “held together” by the owner
• No bench or documented roles
• Culture dependent on loyalty to the seller

If the team is exhausted now, they won’t magically recover when you show up.

Vague or Evasive Seller

This is the most underrated red flag — and the most predictive.

Pay attention to:

• Inconsistent answers
• Delayed document delivery
• “We’ll get that later” responses
• Defensive reactions to basic questions

Honest sellers explain problems clearly. Shady ones explain why you shouldn’t worry.

Red Flag Rule of Thumb

One red flag is a question.
Two is a pattern.
Three means the deal needs a serious haircut — or a hard stop.

The best deals feel boring because the risks are obvious, quantified, and manageable.
The worst ones come wrapped in great stories.

Can You Negotiate a Smarter Deal?

Negotiation isn’t about being aggressive.
It’s about being right — and provable.

If you’ve done the work above, negotiation becomes math, not theater.

Use Price Follows Proof

Good negotiations don’t start with opinions. They start with evidence.

Call out issues that directly affect value:

• Bad or overstated add-backs
• Customer concentration or churn risk
• Owner dependency or missing systems
• Inflated multiples relative to quality
• Capital expenditures or staffing the seller ignored

Tie each issue to dollars.

This isn’t a discount. It’s a correction.

If you can’t explain why the price should move — with numbers — it won’t.

ZOPA + BATNA (Know This Before You Open Your Mouth)

Before you make an offer, define two things:

• ZOPA (Zone of Possible Agreement):
  The realistic range where a deal could close.
• BATNA (Best Alternative to a Negotiated Agreement):
  Your walk-away option if this deal dies.

Ask yourself:

• What’s my maximum price before this stops meeting my return target?
• What deal would I pursue instead if this one falls apart?

If you don’t know your BATNA, the seller does.

Walking away is leverage. Hesitation is not.

Smarter Deal Structures (Price Isn’t the Only Lever)

When buyers and sellers disagree on value, structure is how deals still get done.

Structure should shift risk back to the seller when the story isn’t fully proven.

If the seller won’t share risk, that tells you something.

Anchor with Confidence (Not Emotion)

A strong anchor is calm, specific, and boring.

“I see $210K in reliable SDE and a 3x multiple.
That’s $630K fair value.
I’ll offer $600K all cash, or $650K with seller financing.”

No threats. No drama. Just math.

Then stop talking.

Silence is part of the offer.

Negotiation Reality Check

• You don’t win deals by “getting lucky.”
• You win by being disciplined when others aren’t.
• The best negotiation outcome is sometimes no deal at all.

Overpaying feels good for a month.
Underwriting discipline pays you for years.

Final Verdict

You’re not just buying a business.
You’re buying cash flow, risk, and responsibility — whether you price them correctly or not.

Good deals don’t rely on hope.
They work on verified numbers, manageable risk, and disciplined structure.

If the math holds, the risk is visible, and the price reflects reality, proceed.
If the story needs heroics to make sense, walk.

The goal isn’t to buy a business.
The goal is to buy one that still makes sense after the excitement wears off.

Ready to Run the Numbers Like a Pro?

Acquidex cuts through the BS with real data, risk flags, and fast insights — before you sign anything.

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