How to evaluate a business for sale

A listing description is written to be attractive. A financial statement is not, and that difference is the whole reason evaluation exists as a distinct step between finding a candidate and making an offer. Evaluation is where a buyer moves from a teaser summary and a walkthrough to the actual documents, and decides whether the business supports the price being asked and the life the buyer intends to run inside it. Done properly, it takes real time and usually some professional help; done casually, it produces buyers who discover the real picture only after they have already signed something.

Start with the financial statements, not the listing description

Ask for at least two to three years of financial statements and, where the seller will provide them at this stage, the tax filings behind them, rather than relying on the one-page summary that accompanied the listing. A teaser is written to generate interest; a set of statements is a record you can actually interrogate. If a seller resists sharing statements before you have signed a confidentiality agreement, that is a normal and reasonable ask on their part — sign the agreement and then insist on the real numbers before you go further.

Normalize the earnings before you judge the number

Most owner-operated Canadian businesses report a net profit figure that understates what the business could support under new ownership, because owner compensation, personal expenses run through the business and one-time items all sit inside it. The standard approach is to normalize the earnings — commonly discussed as seller’s discretionary earnings — by adding those items back, but every add-back should come with a receipt or a clear explanation, not just the seller’s word. An evaluation that accepts every claimed add-back at face value is not really an evaluation.

Look past the P&L at what you are actually buying

The income statement tells you what the business earned; it tells you almost nothing about the condition of the equipment, how many years remain on the lease, whether the customer contracts are assignable, or how much inventory is actually sellable versus written off in all but name. A business with strong reported earnings sitting on aging equipment and a lease expiring next year is a different proposition than one with the same earnings and a decade of lease term left, and only a direct look at the underlying assets and contracts reveals which one you are looking at. Walk the premises yourself rather than relying entirely on photographs in a listing, and ask to see the equipment maintenance history if any exists — a machine that has been running on deferred repairs will show it in the records well before it shows up as a breakdown on your own watch.

Weigh how dependent the business is on the current owner

Ask what would happen to revenue if the owner disappeared for a month. In some businesses the answer is very little changes, because staff and systems carry the operation; in others, the owner personally holds the key supplier relationships, the biggest customer accounts and the institutional knowledge that keeps everything running. The second kind of business is riskier to buy at the same price, because a large part of what you are paying for may leave with the person who is leaving anyway, and that risk should shape both your price and your transition plan, not just get noted and set aside.

Check the asking price against more than one reference point

A single asking price in isolation tells you very little. Compare it against the normalized earnings trend over several years, against what general industry commentary discusses as a typical illustrative range for businesses of similar size and sector — never treated as an appraisal — and against what a lender would realistically support given the business’s cash flow. When those reference points roughly agree, you have a sensible starting point for negotiation. When they diverge sharply, that gap is worth understanding before you decide whether or how to proceed.

Assess the industry and competitive position, not just the business

A well-run business in a shrinking industry is still a well-run business in a shrinking industry. Look at whether the sector is growing, flat or declining, whether new competitors or substitute products are eroding the customer base, and whether regulatory change on the horizon could affect how the business operates. None of this shows up on a financial statement, and it is exactly the kind of context that separates a business that will keep earning what it earns today from one whose current numbers are a high-water mark. Talk to a few of the business’s own customers or suppliers where the seller will allow it, read what trade associations or industry publications are saying about the sector’s near-term outlook, and weigh that context alongside the financial trend rather than treating a strong recent year as proof the business is on solid footing indefinitely.

• Two to three years of financial statements and supporting tax filings
• A schedule of proposed add-backs with documentation for each one
• Lease terms, assignability, and years remaining
• A list of material customer and supplier contracts
• Equipment age and condition, and any deferred maintenance