Buying a Business? What the Numbers Should Tell You Before You Make an Offer
Starting a company from scratch is no longer the only path into entrepreneurship.
For a growing number of buyers, the opportunity is to acquire a business that already has customers, employees, systems, revenue, and cash flow.
That trend is becoming increasingly visible. In BizBuySell's 2026 market research, 48% of business brokers reported increased activity from Entrepreneurship Through Acquisition buyers and search funds.
Buying an established company can give you a head start that would take years to build organically.
But it introduces a different risk.
You are buying someone else's history.
Before you decide what that history is worth, the financial information should help you understand what you are actually buying — not just what the seller hopes you will see.
Revenue Is the Beginning, Not the Answer
A business producing $3 million in annual revenue may sound much more attractive than one producing $1 million.
But revenue alone tells you very little about what you will actually own.
What happens after the revenue comes in?
How much goes to labor?
How much goes to materials?
Are margins improving or deteriorating?
Does the company require significant equipment or inventory?
How much cash is ultimately available to the owner?
Two businesses can generate exactly the same revenue and have completely different economics.
So one of the first questions a buyer should ask is not simply:
How much does this company sell?
It is:
What does this company actually produce from those sales?
Look at the Trend, Not Just the Best Year
Sellers naturally want to present their businesses in the strongest light.
A particularly good year may legitimately demonstrate what the company is capable of.
But it should not be the only year you examine.
Look across several periods.
Is revenue steadily growing?
Are margins consistent?
Did payroll increase along with sales?
Has profitability been improving?
Did one unusually large customer change the most recent year?
Were important expenses delayed?
One good year may be encouraging.
Several years tell you much more about the business you are considering buying.
SDE and EBITDA Are Not the Same Thing
Smaller business listings frequently advertise Seller's Discretionary Earnings, or SDE.
Larger transactions are more likely to focus on EBITDA or another measure of adjusted earnings.
Those numbers are not interchangeable.
SDE is commonly intended to show the economic benefit available to a single owner-operator and often adds back one owner's compensation and certain discretionary expenses.
That creates an important question:
Are you buying an investment, or are you buying yourself a job?
Suppose a listing advertises $500,000 of SDE.
That does not necessarily mean you can hire a manager, stay home, and collect $500,000.
Part of that amount may represent compensation for work the seller currently performs.
If replacing the owner requires a $150,000 manager, the economics look different immediately.
Understanding which earnings measure is being presented — and what has been added back to reach it — is essential before comparing asking prices or valuation multiples.
Replace the Seller on Paper Before You Buy the Business
This may be one of the most valuable exercises a buyer can do.
Write down everything the current owner actually does.
The owner may carry the title of president or CEO.
But perhaps they also:
Generate most new sales
Manage the largest customers
Approve pricing
Recruit employees
Estimate jobs
Manage operations
Maintain vendor relationships
Solve the problems nobody else knows how to solve
What happens when that person leaves?
Maybe you intend to perform those roles yourself.
That's fine — but you should understand that part of the business's reported economic benefit is compensation for your future labor.
If you plan to replace the seller with employees or management, model those costs before deciding what the business earns for you.
There is another wrinkle here.
If the seller has been paying themselves more than a market replacement salary, part of that excess may potentially support an add-back.
But if the seller has been paying themselves less than it would cost to replace their work, the adjustment goes the other direction.
The business may actually be less profitable under new ownership than its current financial statements suggest.
Ask How Much Cash the Business Really Produces
Reported earnings are important.
Cash is what ultimately pays employees, funds growth, services acquisition debt, and provides a return on your investment.
A profitable company may still require substantial cash for:
Inventory
Accounts receivable
Equipment replacement
Seasonal operations
Working capital
Technology
Repairs
Growth
Imagine two companies each showing $600,000 of adjusted earnings.
One requires very little ongoing capital investment.
The other regularly needs $200,000 of equipment and additional inventory just to maintain its current revenue.
Those are not economically identical acquisitions.
Ask:
After the business funds what it needs to keep operating, how much cash is really left?
Be Skeptical of Add-Backs Without Assuming They're Wrong
Most privately held business transactions contain adjustments.
Some are perfectly reasonable.
The seller may identify expenses that are personal, discretionary, unusual, or unlikely to continue.
But an item does not become economically irrelevant just because it is labeled an add-back.
Ask:
What exactly is being added back?
Can it be documented?
Has the expense really ended?
Has the same "one-time" expense appeared repeatedly?
Will you incur a replacement cost?
Is an owner's compensation adjustment realistic?
A seller may be completely justified in adjusting historical earnings.
Your job is to determine whether those adjusted earnings represent your future economics.
Customer Concentration Can Change the Entire Risk Profile
A business with hundreds of customers may look very different from one that depends heavily on three.
Suppose two companies each generate $2 million in annual revenue.
Company A's largest customer represents 4%.
Company B's largest customer represents 40%.
If the financial statements otherwise look similar, Company B still carries a very different risk.
Before making an offer, understand:
The largest customers
Their percentage of revenue
How long they have been customers
Contract terms
Renewal dates
Historical retention
Whether relationships belong to the company or personally to the seller
The same exercise applies to key suppliers, referral sources, and distribution partners.
Concentration does not automatically make a business unattractive.
But you should know you're buying that risk.
Don't Ignore the Balance Sheet
You can learn a lot from the income statement.
The balance sheet often tells you where some of the problems are hiding.
Pay particular attention to:
Accounts receivable
Accounts payable
Inventory
Accrued expenses
Debt
Customer deposits
Deferred revenue
Owner loans
Working capital
For example, $500,000 of receivables sounds like an asset.
But what if $150,000 has been outstanding for six months?
Inventory may look valuable until you discover that a significant portion is obsolete or rarely sells.
A profitable company may also have deferred maintenance or equipment that needs replacing immediately after closing.
You want to know those things before you calculate how much cash you will have left after buying the company.
Working Capital Can Change What You Actually Receive at Closing
Many business acquisitions establish a target amount of working capital that must remain in the company at closing.
That can turn balance-sheet quality into real purchase-price economics.
If receivables prove uncollectible, inventory is overstated, or liabilities are larger than expected, the working-capital calculation may change.
This is an area where seemingly small financial-statement issues can become real dollars during negotiations.
Understand how working capital will be defined and calculated before assuming that everything shown on the balance sheet is coming with the business at face value.
Cash-Basis Books May Need Another Look
Many smaller businesses keep some or all of their records on a cash basis.
A buyer may need to understand the company on an accrual basis.
That can reveal receivables that have not been collected, bills that have not been paid, customer deposits tied to future work, accrued payroll, or other obligations that are not obvious from cash-basis results.
The point is not that cash-basis reporting is necessarily inappropriate.
It is that your acquisition analysis may require a different view of the economics than the seller normally uses to run or report the business.
On a Larger Deal, Consider Whether a Quality of Earnings Review Makes Sense
For larger or more complex acquisitions, buyers may commission a quality of earnings, or QoE, analysis.
A QoE is not simply another set of financial statements.
It is transaction-focused work designed to examine issues such as normalized earnings, revenue quality, adjustments, working capital, and other factors that can affect how a buyer views the company's sustainable financial performance.
Not every small acquisition warrants a formal QoE.
But the underlying principle applies at almost every size:
Do not rely solely on the earnings number you were handed. Understand how it was built.
The Tax Structure Can Change the Economics of the Deal
This is one area buyers should think about before signing an agreement.
Buying the assets of a business and buying ownership of the entity can produce very different tax results.
In a typical taxable asset acquisition, the purchase price is allocated among the assets acquired. That allocation establishes the buyer's tax basis in those assets and can affect future depreciation and amortization deductions.
Certain acquired intangible assets, including goodwill, are generally amortized over 15 years for federal tax purposes.
When applicable, both the buyer and seller generally report the allocation of the purchase price on Form 8594, and that allocation affects both sides of the transaction.
An acquisition of stock or other equity can work differently.
The buyer generally establishes tax basis in the ownership interest acquired, while the business's existing tax basis in its underlying assets generally does not automatically increase to the purchase price unless a particular election or transaction structure produces that result.
That distinction can affect future deductions and ultimately the economics of the transaction.
It also explains why the buyer and seller may not always want the same structure or purchase-price allocation.
Do not wait until after the purchase agreement is signed to begin asking about the tax consequences.
Your attorney should handle the legal transaction documents, but your tax advisor can help you understand how the proposed structure may affect you financially.
An Asset Purchase Does Not Always Mean Every Old Tax Problem Disappears
Buyers sometimes assume that purchasing assets instead of the legal entity automatically insulates them from everything that happened before closing.
That can be an expensive assumption.
State laws vary, but some states have successor-liability, bulk-sale, withholding, or tax-clearance rules that can make a purchaser responsible for certain unpaid taxes of the seller if required procedures are not followed.
The rules differ by state and by tax.
That means a buyer should determine before closing whether any state tax clearance, withholding, notification, or other procedure applies to the transaction.
This is exactly the kind of issue that is much easier to address before the money changes hands.
Financing Is Part of the Financial Analysis
A business may look attractive before acquisition debt and far less attractive afterward.
Model the business after the new loan payment.
Can the company still:
Pay you appropriately?
Maintain working capital?
Replace equipment?
Survive a weak quarter?
Invest in growth?
Service the acquisition debt with room to spare?
If SBA financing is part of your plan, confirm the current rules with your lender early rather than relying on what another buyer did several years ago.
SBA lending rules, including borrower eligibility and equity-injection requirements, change from time to time, and brokers surveyed by BizBuySell have pointed to evolving SBA requirements as a source of friction in acquisition financing.
Don't Spend Every Dollar Buying the Business
There is another number buyers sometimes underestimate:
How much cash will you need the day after closing?
The purchase price is not the end of the capital requirement.
You may also need money for:
Payroll
Inventory
Working capital
Insurance
Technology
Marketing
Hiring
Equipment
Professional fees
Unexpected customer losses or repairs
A business can be fundamentally healthy and still put a new owner under enormous pressure if the buyer enters the transaction with no remaining liquidity.
Calculate what it takes to buy the business.
Then calculate what it takes to own the business.
Have Someone Look at the Numbers Who Isn't Emotionally Buying the Company
Buying a business is exciting.
That is precisely why an independent financial perspective can be useful.
Once you start imagining yourself as the owner, it becomes easy to explain away things that deserve another question.
An experienced tax or accounting professional can help you examine issues such as:
Whether reported earnings are supportable
Whether SDE or EBITDA is the right number to evaluate
Whether add-backs make economic sense
What it will cost to replace the seller's work
How much working capital the company actually needs
Whether receivables and inventory deserve additional scrutiny
What cash flow looks like after acquisition debt
Whether the proposed tax structure changes the economics
Whether state tax-clearance issues need attention
The goal is not to decide whether you should buy the company.
It is to make sure you understand what the numbers are telling you before you decide.
Buying an Existing Business Can Be a Powerful Shortcut—If You Know What You're Buying
For a new generation of entrepreneurs, acquiring an established company can offer something a startup cannot:
Customers on day one.
Employees on day one.
Revenue on day one.
Systems on day one.
Potential cash flow on day one.
That can be a tremendous advantage.
But you are also inheriting the company's economics, capital needs, customer relationships, financial history, risks, and — depending on how the transaction is structured — potentially some obligations you did not create.
The goal is not to find a perfect business.
It is to understand the business well enough to decide what it is worth to you.
If you are considering buying a business, contact our firm before you make an offer or commit to a deal structure.
We can help you evaluate the financial information, understand the earnings and cash flow, identify questions worth asking, and examine the tax implications before the business becomes yours.
A good acquisition starts with understanding what you're really buying.
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