Founders evaluate businesses constantly — a competitor for sale, a partner offering a stake, a supplier suggesting a merger. The surface read is revenue and growth. The decision-grade read is three layers deeper.
Layer one: revenue quality
Not all revenue is equal. Ask:
- How concentrated is it? If one customer is a third of the book, you do not own a business — you own a relationship with an expiry date.
- How repeatable is it? Contracted, recurring revenue is worth more than the same dollars re-won every month. A project shop and a subscription shop can show identical revenue and be entirely different risks.
- How was it won? Revenue bought with heavy discounting or one person's personal network may not survive a change of ownership — or a price increase.
Layer two: margin honesty
A margin is only as real as the costs it includes. Sellers routinely present margins that exclude the owner's own labor, market-rate rent, or maintenance that has been quietly deferred. Rebuild the margin yourself: what would this business cost to run with a paid manager, current prices, and nothing postponed? That number — not the one in the deck — is what you are buying.
Layer three: cash conversion
Profit is an opinion; cash is a fact. A business can show healthy profit while its cash is trapped in unpaid invoices, slow inventory, or customers who pay in ninety days. Follow one dollar of revenue all the way to the bank account and count the days and the leakage. The shorter and cleaner that path, the more the profit figure can be trusted.
The question underneath all three
Every layer answers the same question from a different angle: if the current owner walked away tomorrow, what would this business actually be worth to run? Revenue that stays, margins that survive honest accounting, and profit that arrives as cash — that is a business. Everything else is a story about one.
Before you act
- Ask for revenue by customer, not in total — concentration is the first thing decks hide.
- Rebuild the margin with a paid manager and market-rate costs before you negotiate.
- Trace profit to cash: receivables, inventory, and payment terms tell you what the income statement cannot.
- Have your own attorney and accountant review anything you are serious about — this read is a filter, not a substitute.
This is education, not investment, legal, or tax advice. Have your own professionals review any real deal.