You have found a local business that appears to suit your skills, the owner is ready to retire, and the asking price seems just within reach. The first temptation is to discuss settlement dates. What I see all the time, though, is a buyer relying on a few profitable months or the seller’s confidence before checking what is actually being purchased. A sensible starting point is to define the business, its assets, its liabilities and the income it can reasonably produce for a new owner. That turns an appealing opportunity into a question that can be tested.
The asking price is not the same thing as value. A seller may have arrived at a figure by adding equipment, recalling a previous offer or applying a broad industry rule. A valuation considers the business’s earnings, assets, risks and prospects together. Goodwill is the less tangible value attached to customer relationships, reputation, systems and staff continuity. It may be substantial, but it can also be fragile if customers mainly follow the current owner. If you are preparing to buy a business, ask how each part of the price has been supported rather than accepting one unexplained total.
The financial statements need careful interpretation. Normalised earnings means adjusting reported profit to show what the business might earn under ordinary, sustainable conditions. That could involve removing a one-off legal bill or replacing an owner’s unusually low wage with a realistic market cost. Seller’s discretionary earnings, often used in smaller owner-operated businesses, may include the owner’s salary and certain personal expenses, whereas EBITDA measures earnings before interest, tax, depreciation and amortisation. These measures are not interchangeable. For example, a cafe showing strong cash movement may still produce modest earnings once a manager’s wage and equipment replacement are allowed for.
The records should then be tested through due diligence, which is the process of checking whether the information supplied is complete and reliable. Compare several years of accounts with bank deposits, tax records, sales reports and activity shown by the point-of-sale system. Review major customer concentration, supplier terms, lease conditions, insurance, employee entitlements and any disputes. Imagine a printing business where one client produces half the revenue. The business may be sound, but the concentration creates a risk that should affect the price, contract protections or both. Ask for evidence, not just explanations.
The deal structure can change the practical result as much as the headline price. In an asset purchase, you may acquire selected equipment, stock, contracts and goodwill while leaving some liabilities behind, subject to proper legal advice and the terms agreed. In a share purchase, you acquire the company itself, including its existing obligations and history. Working capital is another frequent source of disagreement. It is the short-term funding tied up in items such as stock, invoices owed to the business and bills it must pay. Agreeing a sensible working capital level helps prevent a business being handed over short of the resources needed to trade.
Consider a small trade-services company whose owner says annual profit is $180,000. The accounts show that figure, but the owner also performs most quoting, scheduling and customer follow-up. If replacing that work costs $75,000, the maintainable profit for a buyer is lower than the headline number suggests. Conversely, a business with documented procedures and a trained supervisor may transfer more smoothly. An independent business valuation can provide a structured view of these adjustments, although it does not replace legal, tax, lending or operational advice.
Before making an offer, write down the assumptions behind it. Check whether the price includes stock, vehicles, deposits, prepaid expenses and equipment, and confirm how existing debts, leave obligations and customer deposits will be handled. Plan for a handover period and test whether the cash flow can cover loan repayments, wages, tax and your own drawings. I often see buyers focus on securing a discount when the more useful question is whether the business can support its obligations after completion. A careful purchase is not about finding a flawless operation; it is about understanding the risks well enough to set fair terms.
