Most small business acquisitions are priced off a multiple of earnings. The seller — or their broker — takes three years of financials, calculates an EBITDA, applies a multiple, and presents you with a number. Sometimes it's 3x. Sometimes it's 5x. Sometimes it's whatever the seller thinks the business is worth because they built it.
That number is a starting point for a negotiation. It is not what the business is worth.
Before you pay that price, your job is to beat up the numbers — systematically, without apology, until you know what you're actually buying. In my experience, the adjusted value of a small business is almost always a fraction of the asking price. Sometimes a small fraction.
Here's where most of the value disappears.
Accounts Receivable: Not All Money Is Real Money
The balance sheet shows a receivables number. That number represents money customers owe the business. It gets included in working capital. It makes the business look liquid.
Some of it is real. Some of it is not.
Get the aging schedule. This is the breakdown of AR by how old it is — current (0–30 days), 31–60, 61–90, 90+. What you're looking for:
| Age Bucket | What It Means |
|---|---|
| 0–30 days | Probably collectible |
| 31–60 days | Watch — depends on customer and industry norms |
| 61–90 days | Increasingly doubtful |
| 90+ days | Often uncollectible, regardless of what the balance sheet says |
Most small businesses carry AR that is never going to be collected. The owner knows it's stale. They've written off the expectation internally. But it still shows up on the balance sheet at face value — because nobody has formally written it down, because doing so would reduce the earnings number, and because it makes the working capital position look better than it is.
You need to discount that receivables balance to what it's actually worth. In many acquisitions, 10–30% of the AR balance is questionable. In some, it's worse.
One more thing to check: concentration. If 40% of AR is owed by a single customer, you have a different problem. That customer relationship may not transfer. It may already be at risk. A receivables balance dominated by one account is not the same as a diversified, collectible receivables base — even if the numbers look identical on paper.
Inventory: Stale Product Is Not an Asset
For product businesses, inventory shows up on the balance sheet as a current asset. It's priced at cost. It represents money the business has invested in goods it intends to sell.
The question is: can it actually sell?
Inventory ages. Products get superseded. Demand shifts. Parts become obsolete. What was purchased two years ago at full price may be worth a fraction of that today — or nothing at all. Slow-moving inventory that's been sitting in a warehouse for 18 months is not a $200,000 asset. It's a storage problem.
Get the inventory aging. Ask for it organized by SKU or category and by how long each item has been sitting. Apply your own discount:
| Inventory Age | Realistic Value |
|---|---|
| Under 90 days | Near full value (for product that is still current) |
| 90–180 days | Discounted — slower moving, may require markdown to sell |
| 180–365 days | Significantly discounted — question whether demand still exists |
| Over 1 year | Likely impaired — assume partial or full write-off |
Push back on the broker or seller when inventory is a large line item. They will tell you it's all sellable. Some of it always isn't. Your job is to figure out how much, and to either negotiate a price adjustment or carve out the dead inventory from the deal entirely.
Fixed Assets: Book Value Is Not Market Value
Equipment, vehicles, machinery — fixed assets show up on the balance sheet at original cost minus accumulated depreciation. Book value.
Book value tells you almost nothing useful.
A piece of equipment that was purchased for $100,000 ten years ago and is fully depreciated shows up at $0 on the balance sheet. It might run fine. It might need $80,000 in work. It might need to be replaced entirely. The balance sheet will tell you the same thing in all three cases: $0.
The reverse is also true. Equipment that's been depreciated slowly under an aggressive accounting method might show $60,000 in book value and be worth $15,000 in the real market — because it's old, it's specialized, and nobody's buying used.
For any business where equipment is a material part of operations, you need an independent equipment appraisal. Not a broker estimate. Not the seller's representation. An actual appraisal from someone who knows the market for that equipment.
What you're really asking is: what would it cost me to replace this asset base? That's the number that matters — because if the equipment fails, that's what you're facing. If the answer is dramatically higher than what's on the balance sheet, you have a capital requirement that isn't priced into the deal.
Fully depreciated equipment on the balance sheet isn't free. It's a future capital call waiting to happen.
The EBITDA Add-Back Game
Before we even get to asset quality, there's the earnings number itself.
Sellers and their brokers present "adjusted EBITDA" — which means they've added back things they claim are non-recurring, personal, or otherwise not representative of what the business earns for a new owner. Some of these add-backs are legitimate. Many are not.
Common add-backs to scrutinize:
| Add-Back | The Problem |
|---|---|
| Owner's salary | If you're replacing them, you need to pay someone. Is the add-back realistic? |
| "One-time" expenses | Were they actually one-time? Check the prior two years. |
| Personal expenses run through the business | Legitimate to add back, but verify they were personal — and verify amount |
| Related-party rent below market | If the seller owns the building, what does market rent actually cost? |
| Depreciation | It gets added back for EBITDA — but equipment wears out. Don't pretend capex doesn't exist. |
Every add-back is an argument. Your job is to interrogate each one. The adjusted EBITDA the broker presents is the most optimistic defensible version of what the business earns. Your version should be the most realistic.
In many deals, legitimate adjusted EBITDA is 20–40% lower than the seller's presented number — before you've touched asset quality.
Putting It Together: What the Business Is Actually Worth
By the time you've worked through all of this, you should have:
- An adjusted receivables balance (discounting uncollectible AR)
- An adjusted inventory balance (discounting stale or obsolete product)
- A realistic picture of capital needs (what it costs to actually maintain or replace the asset base)
- A defensible EBITDA number (after your own scrutiny of the add-backs)
Run your multiple on the adjusted EBITDA. Then look at the balance sheet adjustments. Then model the first 18 months of ownership with your debt service layered in.
What you'll often find is that the deal the seller is presenting at $1.5M is, after adjustments, a $700,000–$900,000 business — or that the working capital situation requires an additional $200,000 at close that wasn't in the original conversation, or that the equipment replacement timeline means you'll be spending $300,000 in capital before year three.
None of this means the deal is dead. It means the price needs to move. Or the terms need to change. Or you need seller financing to keep enough cash in the business to survive the transition.
You are not being difficult when you push on these numbers. You are doing the work that protects you after the seller has moved on.
What Good Due Diligence Looks Like
The buyers who end up regretting acquisitions are almost always the ones who moved fast, trusted the broker's presentation, and didn't want to seem difficult by asking hard questions.
The buyers who do well treat due diligence as an investigation, not a formality. They:
- Request aging schedules for both AR and inventory and actually read them
- Hire an independent appraiser for any business where equipment is a material asset
- Build their own adjusted EBITDA from scratch, add-back by add-back
- Model ownership economics — not seller economics
- Ask what would have to be true for the seller's number to be right, and then test those assumptions
The seller spent years understanding this business. You have 60–90 days. The only way to close that gap is to be relentless about the numbers.
Most small businesses are worth buying at the right price. The asking price is rarely the right price.
The Bankability Report is designed for business owners to understand where they stand — but the same financial lens applies to any business you're evaluating. If you're doing due diligence on an acquisition, the profitability, activity, capacity, and capital sections will surface the same issues this article describes.
jrbohlke.com • The Analysis