How to Evaluate a Small Business for Acquisition: The Complete Guide

Buying a small business is one of the fastest ways to become a business owner with real cash flow from day one. But evaluating whether a specific business is worth buying — and at what price — requires a structured approach that most buyers don't have when they start.

This guide walks through the complete evaluation process: what to look at, in what order, and what the numbers should tell you.

Start with the basics: what are you actually buying?

Before you look at any numbers, understand what the business actually is:

• What does it sell, and to whom? Is revenue recurring, project-based, or transaction-based?
• What is the owner's role? Do they run day-to-day operations, or are they more of a figurehead? (This determines owner dependency risk.)
• Why are they selling? Retirement and lifestyle changes are normal. A sudden exit after years of growth should prompt deeper questions.
• What do you get? Asset list, customer contracts, staff, IP, and lease — or just goodwill?

Step 1: Understand the financials

The core financial data comes from the Information Memorandum (IM) — a document prepared by the broker summarising the business. It typically includes 2–3 years of P&L statements.

Key numbers to extract:

| Metric | What to check | |--------|--------------| | Revenue | Is it growing, stable, or declining? | | EBITDA or SDE | The earnings number used for valuation | | Earnings margin | Earnings ÷ Revenue — compare to industry benchmarks | | Earnings history | 3 years if available — calculate the CAGR |

Important: Always ask for tax returns and management accounts to verify the IM figures. Broker-provided financials are sometimes "adjusted" in ways that don't survive due diligence.

Step 2: Assess the valuation

The asking price is almost always expressed as a multiple of earnings:

Acquisition Multiple = Asking Price ÷ Annual Earnings

For example, if a business earns $200,000/year and is asking $800,000, the multiple is 4x.

Whether that multiple is fair depends entirely on the industry. A café at 4x is severely overpriced (typical range: 1–2x). An accounting practice at 4x is reasonable (typical range: 3–5x). An IT managed services business at 4x might even be cheap (typical range: 4–6x).

Use BAS Tool's free calculator to compare any asking price against the benchmark range for the specific industry.

Step 3: Check if you can finance it

This is the most important — and most overlooked — step for most first-time buyers.

The question is not "can I afford the deposit?" but "can the business pay off the loan?"

Calculate the DSCR (Debt Service Coverage Ratio):

DSCR = Annual Earnings ÷ Annual Loan Repayment

Most lenders require a minimum DSCR of 1.25x–1.5x depending on the industry. Below 1.0x means the business cannot service the debt at all — a hard no.

Example: A business earns $180,000/year. You borrow $360,000 (60% of $600,000 asking price) at 8.5% over 7 years. Annual repayment ≈ $71,000. DSCR = 180,000 ÷ 71,000 = 2.53x — excellent.

If the DSCR is below threshold, you have three options: negotiate the price down, increase your equity contribution, or walk away.

Step 4: Assess owner dependency

High owner dependency is the silent deal-killer. Even a financially strong business can be worth much less if the current owner is the business.

Assess five key risk areas:

1. Is the owner the primary customer contact? If key clients only deal with the owner, revenue may leave when they do.
2. Does the owner run day-to-day operations? Without systems, you are buying a job, not a business.
3. Are there documented SOPs? Process documentation determines whether the business can operate without its founder.
4. Would staff leave with the owner? Key employee retention post-acquisition is critical.
5. Does the owner hold critical skills or licences? A plumbing business where the owner is the only licensed plumber has a structural problem.

Each "yes" here increases risk and should be reflected in a lower acquisition price or an earnout structure.

Step 5: Evaluate the earnings trend

Look at earnings over 3 years, not just the most recent year:

• Consistent growth (>10% CAGR): Strong signal. The business is compounding.
• Flat (±5%): Normal. Look for structural reasons before assuming it will accelerate.
• Declining (>5% YoY): Major red flag. Understand why before proceeding. Is it structural or temporary?

Calculate the 3-year CAGR: (Current Earnings / Earnings 2 Years Ago) ^ 0.5 - 1

Step 6: Consider industry risk

Not all industries are equal from an acquisition perspective. Some are structurally stable with recurring demand (accounting, dental, property management). Others are exposed to discretionary spending, online disruption, or high staff turnover (retail, hospitality, gyms).

The industry risk score in BAS Tool reflects:

• Cyclicality of demand
• Competitive intensity
• Barrier to entry
• Regulatory exposure

Higher industry risk demands a lower multiple and higher DSCR buffer.

Putting it all together: the Business Attractiveness Score

Rather than evaluating these six dimensions manually and keeping them in your head, BAS Tool calculates a weighted composite score from 0–10 across all six:

| Dimension | Weight | |-----------|--------| | Financial Quality (margin) | 20% | | Valuation Quality (multiple) | 20% | | Financing Feasibility (DSCR) | 25% | | Industry Risk | 15% | | Owner Dependency | 15% | | Earnings Trend | 5% |

A score of 8+ is highly attractive. Below 4 has significant issues. The score also generates deal flags — automatic red and amber warnings when any dimension crosses a critical threshold.

What to do with your evaluation

The BAS score tells you which deals deserve deeper investigation. It does not replace due diligence.

Once a deal passes the initial evaluation:

1. Request data room access — detailed financials, contracts, staff details, lease terms
2. Engage an accountant for financial due diligence
3. Engage a solicitor for legal due diligence (contracts, IP, liabilities)
4. Conduct operational due diligence — visit the business, interview staff and key customers
5. Submit a conditional offer with standard due diligence conditions

The BAS score is the filter. Due diligence is the proof.

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