How to Evaluate a Business Before Making an Offer

Buying a business isn't like buying a house. There's no standard inspection everyone runs, no checklist that applies the same way twice. Two businesses that look nearly identical on paper, with the same revenue, same industry, same asking price, can turn out to be worth completely different amounts once someone actually digs in. Most first-time buyers skip that part. They see a number the seller gave them, walk the location once, get a good feeling, and make an offer close to asking price. More often than not, that's a mistake, and it's usually not obvious until months after the deal closes.

Alan Mehrez has watched this happen from the broker's side more times than he can count. Buyers get pulled in by a strong pitch and skip the parts of the process that actually matter. And here's the part that catches people off guard: the businesses that turn into bad deals rarely look bad going in. They look completely fine. Sometimes better than fine. That's exactly the problem.

Start With the Financials, Not the Pitch

Before anything else, ask for two to three years of financial statements. Not just the most recent twelve months, but the full picture. A single strong year can hide a business that's actually been sliding for a while or one that got a one-time bump from something that isn't going to repeat under new ownership. A big contract that ended. A seasonal spike that happened to land right before the sale. A cost that got cut temporarily just to make the numbers look better for buyers.

Revenue on its own doesn't tell you much either. What actually matters is what's left after expenses and whether those expenses look realistic for the type of business. If a business shows profit margins well above what's typical for its industry, that's not automatically good news; it's usually a reason to look closer, not a reason to celebrate. Sometimes it means the owner found a genuinely smarter way to run things. Sometimes it means something's being left off the books, or corners are being cut somewhere that won't be visible until after the sale.

It also helps to ask how the books were kept. Was there a bookkeeper or an accountant, or did the owner handle everything themselves in a spreadsheet? Self-managed books aren't automatically a red flag, but they mean you'll want to verify more of the numbers independently instead of taking the summary at face value.

Check How Much the Business Depends on the Owner

This is one of the most overlooked parts of an evaluation, and honestly, it's often the single biggest difference between a business that runs smoothly after the sale and one that quietly falls apart within the first six months.

Ask who actually handles the client relationships. Ask who makes the day-to-day decisions: pricing, hiring, vendor negotiations, all of it. Find out whether there are actual systems in place, written processes, someone besides the owner who knows how things work, or whether the whole operation runs on one person's memory and personal relationships. A business that only functions because of one specific person isn't really a business in the way buyers usually think of it. It's more like a job that happens to have someone else's name attached, and once that person walks away, a chunk of what made the business valuable can walk out the door with them.

This shows up constantly with service businesses, especially projections. Anywhere, all the client relationships live with the owner; a consulting firm where clients specifically hired that one person; or a restaurant where the head chef built the entire reputation. None of that is disqualifying. It just needs to be priced in and planned for, not discovered after the papers are signed.

Look at the track record, not just the projections.

Sellers will almost always show growth projections that assume things go better going forward than they have recently. That's not necessarily dishonest; most people are optimistic about their own business, especially one they've built. But projections aren't facts, and they shouldn't be treated as facts when you're deciding what to offer.

Focus instead on what's actually happened. Revenue over the past three to five years. Whether customers are staying or churning. Whether the business has been gaining ground on competitors or slowly losing it. A flat or declining trend dressed up with an optimistic forecast is one of the more common patterns Alan Mehrez points out to buyers going through this process. Projections are exactly where people get talked into paying more than a business has actually earned. A track record tells you what's real. A projection tells you what somebody's hoping happens next.

Understand the Real Reason the Business Is Being Sold

Every seller has a reason, and not all reasons carry the same weight. Retirement, wanting to try something else, health reasons, moving out of state—these are ordinary and usually don't say much about the business itself. A business that's quietly been losing customers, dealing with a lawsuit, or facing new competition that's eating into margins is a different story entirely.

It's a completely fair question to ask directly, early on, not after you're already emotionally invested in the deal. How it gets answered often tells you almost as much as the financial statements do. A seller who's vague, changes the subject, or gets defensive when asked why they're selling is worth a much closer look before moving forward; that reaction alone is often more informative than the answer itself.

Get a Second Opinion Before You Make an Offer

Even buyers who've done this before benefit from another set of eyes. An accountant to actually verify the numbers instead of taking the summary at face value. A lawyer to go through contracts, leases, and any pending legal issues. Ideally, someone who's been through a few of these evaluations already and knows what tends to get glossed over.

Alan Mehrez tells buyers the same thing pretty consistently: bring in outside opinions early in the process, not after an offer's already sitting in front of the seller. Renegotiating terms after the fact is a lot harder than getting the offer right the first time, and sellers tend to notice and remember when a buyer comes back asking for a lower price after already agreeing to something.

Pro Tip
Never rely only on the numbers a seller hands over directly. Ask for source documents, tax returns, actual bank statements, and real signed contracts instead of a clean summary spreadsheet someone put together specifically for the sale. Summaries can be shaped. Bank statements are harder to shape.

Final Verdict

Evaluating a business properly isn't about assuming every seller is hiding something. Most aren't. It's about separating what's actually true from what simply sounds good during a pitch and taking the time to check before money changes hands. The buyers who end up with solid businesses are almost always the ones who slowed down enough to check the financials carefully, understand exactly how dependent the business is on its current owner, and ask a few uncomfortable questions before signing anything.

Alan Mehrez has seen both sides of this play out repeatedly: buyers who skipped the process and regretted it within the year and buyers who took the extra few weeks and ended up with a business that performed roughly the way they expected it to. That gap doesn't usually come down to luck. It comes down to which buyers actually did the work before making an offer.

A good deal isn't the one that closes the fastest. It's the one that still looks like a good deal twelve months later.

FAQs

Q1: What financial documents should I ask for before making an offer?
At minimum, two to three years of profit and loss statements, tax returns, and a current balance sheet. Bank statements help too, since they confirm the numbers on paper actually match real cash moving through the business.

Q2: How do I know if a business is too dependent on the current owner?
Ask who handles client relationships and daily operations. If the honest answer is "just me" for most of it, that's a sign the business may struggle to run the same way once ownership changes hands.

Q3: Should I trust the seller's growth projections?
Treat them as a possibility, not a fact. Base your actual offer on historical performance, and treat any projections as a bonus if they happen to come true, not something you're paying extra for upfront.

Q4: Is it normal to bring in outside help before making an offer?
Yes, it's standard practice on any serious deal, not a sign of distrust. An accountant and a lawyer reviewing the numbers and paperwork before an offer goes in is just how experienced buyers operate.

Q5: What's the biggest red flag when evaluating a business?
A seller who's noticeably vague about why they're selling, or financials that don't quite line up with what you actually observe when you visit and watch the business operate day to day.