How to review a business acquisition opportunity before you make an offer

You have found a business that might be right. You have the sale particulars, perhaps an Information Memorandum and a set of accounts, and the seller or broker would like to know whether you are interested.

This is the point where it is easiest to lose time and money. Sale documents are written to present the business at its best. A good first review does not try to answer every question. It tells you whether the opportunity deserves more of your time – and what you need to find out next.

Here is a practical way to approach it.

1. Be clear about what is actually for sale

Start with the basics, because they shape everything else:

• What you would be buying. Is it the company (its shares) or the business and selected assets? The difference affects what liabilities come with it, how the deal is taxed and how it is documented. Your legal and tax advisers will explain the implications for your situation.
• What is included. Property, vehicles, stock, intellectual property, key contracts and staff. Note anything that is excluded or owned personally by the seller.
• Why it is being sold. Retirement, a change of focus and ill health are common and straightforward reasons. Others deserve a follow-up question.

2. Find the sustainable earnings

The profit in the accounts is rarely the figure a buyer should rely on. In owner-managed businesses, reported profit is shaped by how the owner has chosen to run things. What matters is the sustainable earnings a new owner could expect – often expressed as normalised EBITDA (earnings before interest, tax, depreciation and amortisation).

Typical adjustments to look for:

• Owner pay. Many owners take a low salary and dividends. A buyer will need to pay someone to do the owner's job at a market rate.
• One-off items. A large insurance claim, a one-off contract or an unusual cost that will not recur.
• Personal or related-party costs. Family members on the payroll, vehicles, or rent paid to the owner for property they own personally – and whether that rent is at a market rate.
• Discontinued activities. Income or costs from parts of the business that have stopped.

Ask how any "adjusted" figures in the sale documents have been calculated. Adjustments that increase profit deserve particular care.

3. Check the quality of the information

Before relying on any figure, ask where it comes from:

• Are the accounts prepared by an accountant, and are they consistent with what was filed?
• Are there recent management accounts, and do they reconcile to the year-end accounts?
• How current is the information? Trading since the last year end can tell a different story.
• Are the figures for this business only, or do they include other activities or companies?

Incomplete or inconsistent information is not necessarily a reason to walk away. It does change how much weight you can put on the numbers, and it usually means more work later.

4. Look at concentration and dependency

Many of the risks in a smaller business sit outside the profit and loss account:

• Customers. How much of the revenue comes from the largest customers? Are there contracts, or is the work repeat business that depends on relationships?
• Suppliers. Are any critical, or difficult to replace?
• The owner. How much does the business rely on the seller's relationships, skills or personal involvement? What happens when they leave?
• Key staff. Who else would the business struggle without?

5. Understand cash, working capital and debt-like items

A profitable business can still need cash. Look at:

• Working capital – how quickly customers pay, how much stock is held, and supplier terms. A buyer needs to know what level of working capital the business normally needs to trade.
• Seasonality – does cash swing during the year?
• Debt and debt-like items – loans, finance leases, overdue liabilities, customer deposits or deferred income. These usually affect what you pay for the business, not just what you inherit.
• Capital expenditure – equipment or systems that will need replacing soon.

6. Sense-check the asking price

With a view of sustainable earnings and the risks, you can start to judge whether the asking price is in a sensible range. Consider:

• how the price compares with the sustainable earnings you have identified, rather than the headline profit;
• how the risks you have found would affect what a buyer is prepared to pay;
• how you would fund the purchase, and whether the business could support any borrowing alongside your own investment;
• whether part of the price could reasonably be deferred or linked to performance.

At this stage, the aim is an indicative view – enough to decide whether to proceed and how to approach an offer. A detailed valuation and offer model comes later, once the opportunity becomes serious.

7. Write down your questions for the seller

A first review should end with a short list of questions. For example:

• How have the adjusted profit figures been calculated?
• Which customers account for most of the revenue, and on what terms?
• What would change when the current owner leaves?
• What has trading been like since the last accounts?
• Are there any disputes, claims or overdue liabilities?

How the seller answers – and how quickly – is useful information in itself.

When to stop, and when to go further

Some findings are reasons to pause: profit that depends on adjustments you cannot verify, heavy reliance on one customer or on the owner, or information that does not reconcile.

If the opportunity still looks right, the usual next steps are:

1. a deeper acquisition assessment – a detailed valuation and financial model, deal structure and the funding requirement, to support your offer;
2. financial due diligence once terms are agreed, to test the figures in detail before you commit.

How Proplexo can help

Our Acquisition Opportunity Review is a focused, independent first look at a business you are considering. We review the information you have, normalise earnings, form an indicative view on value, and set out the key risks and the questions to ask – before you make an offer or spend money on due diligence.

If you are still looking for the right business, you can register your acquisition criteria free of charge.

This article is general information for owner-managed businesses, not advice on your circumstances.