Buying a business
What Should You Evaluate When Buying a Business?
A buyer's evaluation checklist: fit, earnings quality, customers, owner dependence, team, operations and price, with the red flag to watch in each.
By Michael D. Rubin, CEO & Founder · Updated September 2026 · 856 words
Evaluate a business on seven things: whether you want to run it, whether its earnings are real, who its customers are, how much it depends on the current owner, the strength of its team, the condition of its operations, and whether the price makes sense against the cash it produces. Excitement about owning a company makes it easy to skip steps, so use a written checklist and apply it to every business you consider.
The emotional pull of a first acquisition is strong. A checklist is how you keep a good decision from turning on a good first meeting.
Start with fit: do you want this business?
If you would dread the work, no price is low enough. Owners who buy only on the numbers often burn out, and a disengaged owner is the fastest way to lose the customers and staff you paid for. Ask whether you understand how the company makes money, whether you would enjoy the daily problems it produces, and whether your skills cover its weakest area. A repeat-customer home-services company and a small manufacturer produce very different daily problems. If the seller's confidentiality allows, visit on a normal working day and watch how the business actually runs.
Test the earnings, not the story
The marketing package will present adjusted earnings. Your job, with a CPA, is to confirm them. Ask for three years of profit and loss statements, balance sheets and tax returns, and check that the statements reconcile with the returns and with bank deposits. Review each add-back, the expenses the seller says will not continue, and accept only those with evidence. If the seller will not provide accurate financial information, walk away.
Look at the trend as well as the total. Rising revenue with shrinking margins, or earnings that rest on one exceptional year, change the picture considerably. Ask too how the owner is paid, because salary, perks and family members on the payroll all change the true earnings.
Understand the customers and why they stay
Find out who buys, why they buy here rather than elsewhere, and how long they have stayed. A company whose largest customer provides a large share of revenue is riskier than one with hundreds of small accounts, and buyers price that risk; our article on customer concentration explains how. Ask whether key customers have written contracts, whether those contracts can be transferred to a new owner, and whether the relationships belong to the company or to the seller personally. The owner should be able to describe the customer base clearly. If they cannot, that is a warning in itself. Where the records allow, compare how many customers bought again this year with the year before; repeat business is the clearest sign that customers stay for the company.
The rest of the checklist
Beyond earnings and customers, work through each remaining area and write down what you found, including the answers you did not like. Talk to the owner about each row, then test the answers against records. Owners are usually honest, but they are also used to their business, and problems they have lived with for years may not seem worth mentioning.
| Area | What to ask for | Red flag |
|---|---|---|
| Owner dependence | What the owner does each week, and who could do it instead | Every key customer, supplier and quote runs through the owner |
| Team | Organization chart, tenure, pay and overtime | Heavy overtime, high turnover or one indispensable employee |
| Operations | Equipment list, maintenance records, systems | Deferred maintenance, or processes that exist only in someone's head |
| Growth plan | The owner's view of where growth would come from | No plan, or one that depends on the seller staying |
| Market | Competitors, pricing and industry direction | A shrinking market or dependence on one supplier |
| Price | Asking price against cash flow after debt service | A price that only works if you grow the business first |
Weigh the price against the cash, not the revenue
Revenue is not what you are buying; cash flow is. Compare the price with the earnings you have verified, then work out what the business would pay you after the loan payments and the reinvestment it needs. A lender will run the same test, and our business financing page explains the common structures. A company that only works on paper if everything goes right is priced too high for you, however much you like it.
Be wary of a price justified by what the business could do rather than what it does. The seller deserves to be paid for results already achieved; the growth you create after closing should be your reward, not something you pay for in advance.
How our companies arrive ready for this checklist
MDR & Associates represents owners selling profitable Texas companies with $3 million to $100 million in annual revenue. Every company we take to market comes with a financial recast built from three years of records, a confidential marketing package and a professionally produced HD video, which gives a buyer a solid starting point for the checks above. Your own CPA and attorney still do the verifying. Qualified buyers can register at buy a business to receive blind profiles.
Where this fitsBuy a business in Texas →
Questions owners ask next
How many years of financial records should I ask for?
Three years of profit and loss statements, balance sheets and tax returns is the usual starting point, plus year-to-date figures. Your CPA may ask for more detail, such as bank statements, revenue by customer or inventory records, to confirm that the numbers reconcile.
What if the seller's financial statements do not match the tax returns?
Ask for an explanation and have your CPA review it. Small timing differences can be legitimate. Large or unexplained gaps usually mean the reported earnings cannot be relied on, and a lender will reach the same conclusion. Without accurate records, most buyers should walk away.