Buyer's Guide
How to buy a business without getting burned
Most business buyers make the same mistakes. They fall in love with an idea, skip due diligence, overpay, and discover problems after closing. This guide covers what actually matters when buying a business.
Why Buy Instead of Start?
Starting a business from zero means no customers, no revenue, no reputation. You burn through savings while hoping things work out. The SBA reports about 20% of new businesses fail in year one. Half are gone by year five.1
Buying an existing business means customers from day one. Cash flow from day one. You're paying for proof that the model works. A $300,000 business doing $100,000 in annual profit pays for itself in three years. And you draw a salary the entire time.
What Actually Matters When Evaluating a Business
Profit, Not Revenue
A business doing $500,000 in revenue with $50,000 profit is weaker than one doing $300,000 with $90,000 profit. You don't take home revenue. You take home profit.
Understand SDE (Seller's Discretionary Earnings)
When a business reports "net profit," the owner's salary has already been subtracted as an expense. But if you buy the business, you get both the profit and the salary. SDE combines them to show what you can actually take home.
Example:
- Revenue: $300,000
- Minus rent, supplies, employee wages: -$170,000
- Minus owner's salary: -$80,000
- Net profit: $50,000
SDE calculation:
Net profit ($50,000) + Owner's salary ($80,000) = SDE: $130,000
If you buy this business and run it yourself, $130,000 is what you can take home.
When comparing businesses, always ask for SDE, not just net profit.
Why Is the Owner Selling?
"I want to retire" from a 68-year-old means they've run the business for decades and want to enjoy life. That's a good sign. The business worked for them.
"I want to retire" from a 45-year-old often means something else. They're exhausted. They work 70-hour weeks. They haven't taken a vacation in years. The stress is affecting their health or family. They're not retiring. They're escaping. That's a warning sign about what you're buying.
Good reasons to sell: Actual retirement (age 60+), health issues, family relocation, partner buying them out, once-in-a-lifetime opportunity elsewhere.
Suspicious reasons: "Ready for something new" (exhausted), "want to spend more time with family" (the business consumes their life), declining sales they're not mentioning, partnership disputes, landlord problems, new competitor taking customers.
Ask yourself two questions: If this business is profitable and easy to run, why sell it? And if it's so profitable, why not hire a manager and collect income without working? The fact that they're selling instead of stepping back tells you something. Either the business can't run without them, or the profits aren't as good as they claim.
Customer Concentration
If one customer is 30% of revenue, you're not buying a business. You're buying a client relationship that could walk away. What happens when that customer learns there's a new owner? They renegotiate. Or leave.
If 100% of revenue comes from one buyer, you're not buying a business. You're buying a job. You work for that customer. They control your income, your schedule, your future. That's not ownership. That's employment without benefits.
If 50% of revenue comes from two clients, you basically have two jobs. One day shift, one night shift. Lose either one and half your income disappears overnight.
Ideal: No single customer over 10% of revenue. Acceptable: No single customer over 20%. Red flag: Any customer over 30%.
Owner Dependence
Can this business run without the current owner? If the owner is the rainmaker, the key relationship holder, and the only one who knows how things work, you're not buying a business. You're buying a job that requires you to be that person.
Ask: "If you took a month off, what would happen?" If the answer involves the business falling apart, that's a problem. Good businesses have systems. Great businesses run on systems.
Due Diligence: Trust Nothing, Verify Everything
Sellers show you the best version of reality. Your job is to find what they're not telling you.
Financial Records
Get three years of tax returns, not just P&L statements. Tax returns are filed with the IRS. Sellers lie to buyers. They don't lie to the IRS. If the numbers don't match, ask why.
Bank Statements
Request 12-24 months of bank statements. Compare deposits to reported revenue. Look for cash transactions that weren't recorded. If $400K shows in bank deposits but only $350K in reported revenue, something's off.
Customer Verification
Call the top 10 customers. Ask if they plan to stay after ownership changes. Ask about their relationship with the current owner. Ask if they've considered competitors. You'll learn more in these calls than in any financial statement.
The Lease
Read every word. How long is left? Can it be renewed? At what rate? Can the landlord terminate on ownership change? A great business in a location with 6 months left on the lease and no renewal option is worthless.
Employee Interviews
Talk to key employees privately. Are they staying? What's really going on? What would they change? Employees know where the bodies are buried.
Due diligence takes 30-60 days. Any seller pressuring you to close faster is hiding something. Walk away from anyone who won't give you time to verify.
What to Pay
Most small businesses sell for 2-4x annual SDE. The multiple depends on industry, growth trajectory, and risk factors.
| Business Type | Typical Multiple | Why |
|---|---|---|
| Service businesses | 2.0-3.0x | Often owner-dependent, harder to transfer |
| Retail | 1.5-2.5x | Thin margins, location-dependent |
| Restaurants | 1.5-2.5x | High failure rate, labor intensive |
| Manufacturing | 3.0-4.0x | Equipment value, harder to replicate |
| SaaS / Subscription | 3.0-5.0x | Recurring revenue, scalable |
If a business has $100,000 SDE and the seller wants $400,000, that's 4x. High end for most small businesses. You need to see strong growth, recurring revenue, or valuable assets to justify that multiple.
Review all transaction costs, including any professional or broker fees disclosed by the parties. Evaluate the asking price using the business's financial performance, assets, liabilities, and market comparisons.
Negotiation Tactics That Actually Work
Never accept the first price. Sellers build in negotiation room. Starting 15-25% below asking is normal.
Push for seller financing. If the seller won't finance part of the deal, ask why. Sellers who believe in their business are willing to bet on its continued success. 10-30% seller financing with payments over 3-5 years is common.
Use problems you find. Discovered that two major customers are leaving? That the equipment needs replacing? Adjust your offer accordingly. Bring documentation.
Include an earnout. If the seller claims the business is about to grow 40%, tie part of the purchase price to that growth actually happening. "I'll pay $250,000 now, plus $50,000 if revenue exceeds $500K next year."
Negotiate the transition. Most sellers offer 2-4 weeks of training. Push for 60-90 days of availability, at least by phone. The first months are when you'll have questions.
Financing Your Purchase
Most buyers don't have $300,000 cash sitting around. Here's how deals actually get funded:
Seller Financing
Seller loans you 10-30% of purchase price. You pay over 3-7 years at 6-10% interest. Common and often easiest to arrange.
SBA 7(a) Loans
Government-backed loans up to $5M. 10% down payment, 10-year terms. Takes 60-90 days. Need good credit and solid financials.
Conventional Bank Loans
20-25% down, 5-7 year terms. Harder to qualify. Banks want collateral, strong business history, and your personal guarantee.
401(k) Rollover (ROBS)
Use retirement funds without penalty. Complex setup, ongoing compliance. Consult a specialist. Done wrong, the IRS comes calling.
A common small-business acquisition structure is roughly 20% cash down, 50% bank or SBA financing, and 30% seller financing. In practice, our research on how buyers finance a business acquisition shows that seller financing is often the dominant funding source. Getting pre-approved before making offers makes you a stronger buyer.
Mistakes That Cost Buyers $50,000+
Falling in love with the idea. The cute coffee shop, the "cool" tech company. If the numbers don't work, the dream becomes a nightmare. Let financials drive decisions, not emotions.
Skipping due diligence. "The seller seems honest" isn't verification. The nicest sellers sometimes have the most to hide. Verify everything.
Buying a job. If you're paying $200,000 for a business that nets $70,000 and requires you working 60 hours a week, you just paid $200,000 for a below-market salary. Factor in your time.
Ignoring the lease. Location-dependent businesses without favorable leases aren't really for sale. They're renting success from a landlord who can change terms.
Not using professionals. A business attorney costs $3,000-$5,000. A bad purchase agreement costs $50,000+ to fix later. An accountant reviewing financials costs $1,000. Discovering fraud after closing costs everything.
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1 U.S. Small Business Administration Office of Advocacy. "Frequently Asked Questions About Small Business, 2024." https://advocacy.sba.gov/2024/07/23/frequently-asked-questions-about-small-business-2024