How to Analyze a Small Business Deal

TL;DR: What Smart Buyers Do

1. Start With the Numbers
   SDE is your “real” salary — audit every add-back.
   Look beyond revenue: check profit margins, cash flow, debt.
   Verify trends over 3 years — not just the shiny current year.

2. Do the Dirty Work
   Match P&Ls to tax returns and bank statements.
   Audit working capital — don’t buy a cash-starved mess.
   Expose the games: delayed expenses, inflated one-timers, etc.

3. Figure Out What It’s Actually Worth
   SDE × Industry Multiple = only a starting point.
   Use asset value and reverse DCF to check the math.
   If it only makes sense with “potential,” it doesn’t.

4. Spot the Red Flags Early
   Owner is the business? Run.
   Revenue spike before sale? Check for manipulation.
   Shady add-backs, customer concentration, missing docs? Major red flags.

5. Negotiate Like a Pro
   Anchor your offer with data — not emotion.
   Structure smarter deals with seller financing, earn-outs, or holdbacks.
   Know your walk-away point (BATNA) and stick to it.

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 + add-backs.

What to check:

• Compare tax returns vs profit and loss statements
• Audit the add-backs
• Analyze owner workload and replaceability

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

Margin Check — Is It Efficient?

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

Compare these against industry benchmarks.
If gross margin is way below the norm, dig in.

Cash Flow Reality

Accrual accounting lies. Check:

• Accounts receivable trends
• Inventory build-up
• Owner draws vs income

Pro tip: Always check the bank statements.

Revenue Trends

• Is it growing steadily?
• Any one-off spikes?
• What’s the moat: brand, IP, location?

Ask: “How would I grow this 20% next year?”
If you don’t know, that’s a problem.

Quick Ratio & Debt Load

• Quick Ratio = (Cash + A/R) ÷ Current Liabilities
  Aim for 1.0 or higher.

Check for:

• Total debt
• Balloon payments
• EIDL loans or maxed LOCs

Do the Dirty Work: Financial Due Diligence

Step 1: Get the Docs

Request 3 years of:

• P&Ls, balance sheets, tax returns
• Cash flow statements
• Bank, payroll, and loan documents

Step 2: Audit the Add-Backs

Step 3: P&L to Tax to Bank Match

Cross-check P&L → Tax Return → Bank Deposit.
If they don’t line up? Big red flag.

Step 4: Normalize Working Capital

Check:

• A/R aging
• A/P terms
• Inventory depletion or hoarding

Step 5: Spot Seller Games

Watch for:

• Delayed expenses
• Front-loaded revenue
• Magically clean books

Valuation – What’s It Actually Worth?

SDE × Industry Multiple

This is the headline method — and the most abused.

Rule of thumb:

• Low quality: 1.5–2x
• Solid biz: 2.5–3x
• Growth & stability: 3.5–4x+

Asset-Based Valuation

Use when:

• Biz is asset-heavy
• Profit is weak or nonexistent

Formula: Tangible Assets – Liabilities

Reverse DCF Gut Check

Formula: SDE ÷ Desired ROI
e.g., $300K ÷ 0.25 = $1.2M value (if you want a 25% return)

Red Flags You Can’t Ignore

• Owner = Business
• Suspicious add-backs
• High customer concentration
• Revenue spike before sale
• No online presence
• Burned-out staff
• Vague or evasive seller

Can You Negotiate a Smarter Deal?

Use Price Follows Proof

Call out:

• Bad add-backs
• Customer risk
• Inflated multiple

ZOPA + BATNA

Know your range and your walk-away option.

Smarter Deal Structures

Anchor with Confidence

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

Final Verdict

You’re not just buying a business. You’re buying risk, cash flow, and a whole lot of headaches.
Value it like your savings account depends on it. Because it does.

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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