How to Evaluate a Business for Sale

The Seven-Part Evaluation Scorecard

Score each area strong, acceptable, weak, or unresolved. An unresolved score means the evidence is insufficient—not automatically that the business is poor. Record the source and the next verification step.

1. Rebuild the Earnings Figure

Identify whether the listing uses SDE, EBITDA, net income, adjusted cash flow, or an undefined number. Start with the relevant tax return and financial-statement profit, then reproduce every adjustment from the general ledger. Trace material revenue to deposits, merchant statements, invoices, or other third-party evidence.

Owner pay, interest, depreciation, amortization, and genuinely discretionary or nonrecurring expenses may be considered in SDE, but labels differ. Replace work the owner performs but the buyer will not. Restore costs that are temporarily low, deferred, related-party, or necessary after closing. Compare three tax years, trailing twelve months, and current year-to-date performance; a declining business should not be priced solely on a historical peak.

2. Test the Price as a Range

Calculate asking price divided by normalized SDE or EBITDA. Use comparable multiples as reference points, not proof. Document how size, margin stability, recurring revenue, growth quality, concentration, owner dependence, records, assets, lease terms, capital needs, and deal structure affect the range.

Clarify what the headline price includes. Inventory, cash, debt, receivables, working capital, vehicles, real estate, transaction fees, repairs, and assumed obligations change the buyer’s total funding need. A seller note or earnout can change timing and risk allocation without correcting an unsupported valuation.

3. Model Debt Coverage and Buyer Economics

Estimate annual principal and interest, then divide the cash flow available for debt by annual debt service. The numerator should reflect the lender’s definition and realistic post-close costs. Run downside cases with lower revenue, compressed margin, higher payroll, required repairs, and a cash reserve.

Separate compensation for the buyer’s labor from return on the buyer’s invested equity. A deal can technically cover debt while providing inadequate pay for the hours, risk, and capital required. Financing approval also does not establish investment merit.

4. Measure Customer and Supplier Concentration

Review revenue and gross profit by customer, product or service, location, channel, and month. A large low-margin customer may create more operating dependence than its revenue share suggests. Review contracts, renewal and termination rights, assignment, pricing, churn, credits, chargebacks, and the seller’s personal role.

Apply the same analysis to suppliers, referral partners, marketplaces, and labor sources. Confirm whether terms and allocations continue after a change of ownership. Model what happens if the largest relationship disappears.

5. Price Owner Dependence and Transfer Risk

Write down everything the owner does each week: sales, estimates, production, hiring, approvals, licensing, technical work, purchasing, collections, and customer recovery. Decide which duties you will perform and which require market-rate replacement. Confirm whether key employees intend to remain without creating promises the seller cannot make.

Read the lease, contracts, franchise documents, licenses, permits, software terms, equipment leases, and vendor agreements for assignment or change-of-control requirements. A profitable operation that cannot retain its location, license, data, or primary contract may not be transferable on the proposed terms.

6. Find Capital and Working-Capital Needs

Inspect the fixed-asset register, titles, liens, maintenance history, downtime, and replacement schedule. Separate maintenance capex from optional growth spending. Review inventory age and obsolescence. Understand the cash conversion cycle, seasonality, customer deposits, gift cards, accrued expenses, and normal level of receivables, payables, and inventory.

A business can report attractive SDE while consuming cash through inventory growth, receivable delays, repairs, or payroll timing. Include these requirements in the cash-at-close and post-close reserve model.

7. Search Outside the Seller Package

Confirm the exact legal entity, former names, DBAs, addresses, and relevant owners before searching. Depending on the business, review Secretary of State records, UCC filings, courts, bankruptcy, taxes, licenses, EPA, OSHA, DOL, FMCSA, and industry regulators. Use official sources where available and preserve source URLs, identifiers, retrieval dates, and coverage notes.

A possible name match is not a confirmed finding. An empty result is not proof that no record exists. Public data can be incomplete, delayed, paywalled, or split across jurisdictions. State what the search can establish and what still requires counsel, agency confirmation, or seller evidence.

8. Create a Decision Memo

Summarize verified facts, seller claims, calculations, conflicts, missing evidence, potential exposure, and next actions. For every material issue choose: clear it, investigate it, quantify it, reprice it, remediate it, insure it, allocate it in the agreement, delay closing, or stop.

Set stop rules before becoming emotionally committed. Examples include unreconciled revenue, unsupported material add-backs, inadequate downside coverage, inability to transfer an essential license or lease, unresolved lien releases, unlawful operations, or refusal to provide ordinary evidence.

Frequently Asked Questions

This guide is preliminary educational support, not an appraisal, audit, legal opinion, accounting review, lending decision, or recommendation to buy.