Buying a Company: What to Examine Before You Make an Offer

Before making an offer, a founder-buyer examines how much of the company's current earnings will still be there once the seller has gone, and what evidence supports that answer. That is the central commercial question. Sitting alongside it are the liabilities you would take on, the investment the company needs to keep performing, and what the transaction includes.

This assumes you have already chosen acquisition as a growth path. It does not assume that this particular company should be bought, which is what the rest of the page is here to help you decide. Whether an acquisition beats building the same capability yourself, what you are buying, and how founders fund a purchase are covered in growing by acquisition. The mirror of this page, what a seller should fix in their own company before buyers examine it, is exit readiness. Buying out a co-founder inside a company you already own is a different transaction, covered in buying out a business partner.

This is general education on commercial judgment. Ask your attorney and your CPA which legal, tax, contractual, and jurisdictional questions apply to your transaction.

What are you buying?

My view from investment banking is that a company's valuation tends to track the repeatability of its revenue generation, and that a valuation improves as the owner's absence stops threatening the business. Repeatable revenue only carries value once it produces cash earnings after the costs and the investment needed to keep producing it. For a buyer, that principle turns into a practical question: how much of the current earnings will remain after the seller leaves?

Last year's financial results describe what happened under the current owner. They do not establish what happens under new ownership. The buyer has to work out which results came from durable business behavior and which depended on the seller's relationships, judgment, reputation, or daily intervention.

Every important question asked before an offer should serve that distinction. You are testing whether the company can reproduce its earnings under different ownership, and how much uncertainty is left around your conclusion.

I spent 30 years in investment banking, I am a UK-qualified accountant, and I have bought a business partner out of my own company. I chair CEO peer boards in Miami and I am acquiring myself. What I have watched decide transactions is whether the revenue could be repeated by someone other than the person selling it, and whether the earnings underneath it survived the cost of keeping it.

What the reported earnings leave out

The profit figure a seller shows you was produced under their ownership, their compensation, and their tax position. Before it can tell you anything about what you would earn, it has to be restated onto the basis you would operate on. This is where a founder-buyer without an accountant beside them tends to get hurt, because the adjustments run in both directions and the seller has only volunteered the flattering ones.

The questions to put to your CPA, on the records you are given: what is the owner taking out in salary, benefits, vehicles, travel, and personal costs run through the business, and what would it cost to employ someone to do that job? Are there related-party arrangements, rent paid to a building the owner owns, family members on payroll, a supplier connected to the seller, and what would those cost at market rates? Which items in the last few years were one-time events rather than part of normal trading? How is revenue recognized, and does that timing hold up? What is the history of bad debts and write-offs?

Then the other direction, which is the half buyers miss. Maintenance capital expenditure is the money the company has to spend to keep operating at its current level: vehicles, equipment, systems, premises. Where that spending has been deferred, the reported earnings are higher than the business can sustain and you inherit the bill. Ask what has been put off and what it would cost to catch up. Ask the same about working capital, meaning the cash tied up in inventory and in the gap between paying suppliers and collecting from customers, because the business needs a certain level of it on the day you take over and someone has to fund that.

Your CPA does this work. What you need to carry into the negotiation is the difference between the number the seller presented and the number that survives the restatement, and which of the adjustments are still assumptions rather than established facts.

Which questions should you ask first?

Evaluating a company consumes management attention, adviser time, and money, and those costs rise as you move from conversations to document review and formal diligence. Investigate in an order that lets a weak opportunity be rejected early, while rejecting it is still cheap.

The first conversation should establish the seller's basic account of the company. Why is the owner considering a sale? What does the owner do each week? How does the company win and keep customers? Who else carries commercial and operational authority? Which employees would be hard to replace, and what would keep them after a sale? What does the seller expect to happen after a transaction?

These questions are cheap next to what comes later, and on their own they prove nothing. What they produce is the story the evidence will later have to support, and they expose contradictions inside it. An owner who says the company runs independently should be able to name who makes the important decisions and who holds the key relationships.

Before making an offer, you need enough information to decide whether that story is credible and whether a price can be supported. Ask at this stage for selected financial information, customer concentration and retention data, sales and pipeline records, gross margin by customer or service line, organizational detail, and the documents behind the material claims. The work here is narrower than diligence: it establishes that the opportunity deserves an offer, and it identifies the assumptions the offer depends on.

A seller may hold some information back until they have accepted an offer or you have a more formal position in the process. Detailed contracts, identifiable customer and employee records, and deeper financial support are the usual candidates. Know which of your conclusions are still provisional because the evidence underneath them has not been provided yet.

Your attorney should define the status, wording, conditions, and consequences of anything you put forward as an offer. Your CPA should advise on the financial and tax work required before you commit.

How do you separate a claim from evidence?

A seller controls the initial flow of information and has an understandable interest in presenting the company well. That does not make a seller dishonest. It means you have to separate description from verification, and do it without giving offense, because you may need this person's cooperation through diligence, closing, and whatever transition follows.

Take a seller who says the customers are loyal. Clarify what loyal means here. Do customers buy under agreements, established ordering patterns, or personal understandings? How long have the relationships run? Who maintains them? What happened the last time pricing, service, or personnel changed?

Then ask for evidence that could support or weaken the claim. Useful evidence is tied to observable behavior: transaction histories, invoices, bank activity, customer communications, system records, signed documents, or reports that reconcile to another source.

Evidence gets stronger when independent sources agree. A sales report carries more weight once it reconciles with invoices, cash received, and the accounting records. A claim about a broad customer relationship becomes clearer when you can see who communicates with that customer and why they keep buying.

Pay attention to how the information was produced. Was this report used to run the company, or assembled for the sale? Can someone explain where the data came from? Do the totals reconcile across periods and systems? Does the seller answer follow-up questions directly, or move to a different subject?

A refusal matters, and its meaning depends on context. Sensitive information is sometimes withheld for legitimate commercial, privacy, or legal reasons. Ask what concern prevents disclosure and whether another form of evidence would address it. Redacted records, aggregated figures, review by advisers, or staged access may serve instead. Your attorney should set the confidentiality arrangements and the access process.

A smaller company may lack records that a more formally run business would keep, and missing evidence is not an automatic rejection. It is an unresolved risk, and it should stay labeled that way. You can look for substitute evidence, test a sample that you or your adviser select rather than one the seller assembles, speak with an informed third party where that is permitted, or make the offer conditional on later confirmation. What you cannot afford is to let missing information turn into assumed information as the process moves on.

How can you tell whether the customers belong to the owner or the company?

In an owner-dependent company this question can decide the transaction, and you have to answer it from outside, by reconstructing how revenue happens.

Start with the customer's path into the company. Ask how a prospect first hears about the business, who develops the relationship, who makes the sale, who delivers the work, and who handles problems. Then compare that explanation against the records.

Watch whose name appears. If the seller runs through the customer communications, the approvals, the negotiations, and the problem resolution, work out what those interactions are contributing. If employees are said to own the relationships, the records should show customers dealing with those employees and accepting their decisions.

Ask the seller to walk through recent wins and losses in detail. Who opened the opportunity? Why did the customer choose this company? Who approved the terms? What nearly stopped the sale? A repeatable process can be described in observable steps: who does what, at which point, with what conversion record behind it. Anecdotes about the owner's relationships are not that description.

The same method applies to retention. Work out why customers stay and what would make them leave. Habit, contractual commitment, service quality, difficulty of switching, and personal loyalty carry different levels of confidence, and a contract tells you what a customer agreed to rather than whether they will renew. Test each one for how long it runs, whether it survives a change of ownership, and how much of it depends on a particular person. You do not need to sort every relationship into a category. You need to understand the behavior behind the revenue.

Then ask the departure question directly: what changes for the customer on the day the seller is no longer there?

A seller may offer introductions, a transition period, or continued involvement. Treat those as mitigation and verify transferability separately. Identify which employees, processes, records, and service commitments remain once the seller's role changes.

Where customer contact is permitted at all, it needs care. Badly timed outreach can damage the company and disclose a possible transaction. Agree the purpose, timing, and participants with the seller, with your attorney advising on confidentiality and process.

What must be settled before you name a price?

Settle your assumptions before you name a number.

Before naming a number, you should be able to explain which earnings look repeatable, what the seller personally contributes to them, and what remains unknown. You should also understand what role the seller expects after closing, and whether the evidence you have supports the company's account of itself.

You will not have certainty at this stage. What you need is a clear line between what has been established, what you are provisionally accepting, and what still needs confirming, kept in writing so it survives the pressure of a negotiation.

You should also know what the transaction covers. Whether you are buying assets or shares, what cash, debt, and other liabilities travel with the business, and how much working capital has to be in it on the day you take over are all questions that move the sum you hand over at closing. Settle them with your attorney and CPA before a number goes out, because reopening them afterwards reads as retrading.

An unsupported number spoken early can blur that line, because either side may start treating it as an anchor and organizing later information around it. A qualified range is a different thing, and it can be useful early to find out whether your expectations and the seller's are close enough to be worth the work. What causes damage is a specific number you cannot yet explain. You can also discuss process before price: what information will be available, who is authorized to share it, which assumptions have to be tested, and what happens if later evidence differs from the initial presentation.

When you do propose a price, write down the assumptions with it. That record is what explains the basis for a later revision. Whether the proposal can be changed or withdrawn at all depends on its wording and its legal status, which is your attorney's territory. Your attorney should prepare or review the offer language, and your CPA should confirm the financial and tax assumptions behind the decision.

How can an offer address what you could not verify?

An offer can allocate unresolved risk. It cannot verify the claim underneath it, and terms that shift exposure bring their own risks around collection, enforcement, tax, and the behavior they encourage in the seller.

Consideration paid over time covers several instruments that are worth keeping distinct, because they allocate different risks: a fixed payment deferred to a later date, an amount held back or placed in escrow, financing provided by the seller, and consideration contingent on how the business performs after closing. Their function is to reduce your exposure where future performance or continuity is uncertain. Which one fits which risk is a question for your advisers.

Conditions can give a party the ability to delay, waive, renegotiate, or withdraw where specified information, approvals, or business facts are not confirmed. They exist to preserve your ability to respond when later diligence changes the case for buying.

Contractual protections allocate responsibility if a statement turns out to be inaccurate or an obligation is not met. They define consequences, remedies, and recourse. What decides whether they are worth anything is the detail underneath: how long they survive, the thresholds and caps on a claim, what is excluded, how a claim is made, and whether the seller would still be able to pay. Ask your attorney to walk you through those before you rely on any of them.

Seller involvement after closing can support introductions, knowledge transfer, and continuity. It reduces disruption while responsibility moves to you and the continuing team.

Each of these carries legal, financial, tax, and behavioral consequences, and the terms that fit depend on the transaction and the jurisdiction. Your attorney and CPA should design and review them. The commercial logic stays with you. Map each material risk you found to one of four responses: verify it, price it, cover it with a term you could enforce, or withdraw. Some risks take more than one of those, and some should not be accepted at any price.

When should you walk away?

Walk away when the evidence stops supporting the reason you wanted the company, or when the uncertainty left over cannot be reduced, priced conservatively, or covered by terms you could enforce.

Repeated inconsistencies deserve attention, and so do changing explanations, records that will not reconcile, pressure to commit before information is available, and resistance to reasonable verification. Any single one of these may have an innocent explanation. A pattern of them means narrowing what you are willing to rely on, verifying independently what you had been prepared to take on trust, and revising the assumptions under your price. Where the material questions stay open after that, withdraw.

Leave also when the price only works on assumptions you cannot support. Optimism about what you will do with the company after closing is not evidence about how it performs today.

Sunk costs make this hard. Adviser fees, travel, meetings, and management time are already spent by the time the doubts arrive, and none of it is recovered by closing. Where the evidence no longer supports the price or the reason for buying, stop, and accept the evaluation cost as the price of finding out. The alternative is to add the purchase price and everything that comes after it to a decision you have already stopped believing in.