Red flags in the numbers, and which ones are fatal

Almost every set of small-business accounts has something odd in it. The skill is telling a bookkeeping quirk from a business that does not work, and knowing which of the two you are looking at before you spend on lawyers.

Fatal, usually

• Tax returns that do not reconcile to the P&L, with no explanation offered.
• A single customer above 40% of revenue whose contract ends near close.
• Revenue that only grew because of one-off pandemic or grant money.
• A lease with under two years left and no renewal right, on premises the business cannot move from.
• The owner is the only person who can do the technical work, and will not stay.

Worth a price conversation

Usually nothing

• Personal expenses run through the business, if they are documented and consistent.
• A messy chart of accounts. Annoying, not dangerous.
• One bad month with an obvious cause.
• Owner salary well above or below market. That is what add-backs are for.

Add-backs that do not survive

Sellers add back costs a new owner would not carry. A vehicle, a family salary, one-off legal fees: reasonable. What does not survive scrutiny is adding back a cost that is genuinely required to run the business, such as the manager you would have to hire to replace the owner. Ask for the add-back schedule as a list with a reason per line.

Revenue that is not really revenue

• Deposits for work not yet delivered, booked as revenue.
• Intercompany sales to another business the owner controls.
• One-time project work presented as recurring.
• Grant or relief money in the top line.

How to raise it

Name the line, the number and the year, and ask what explains it. Sellers respond well to a specific question and badly to an implication that the books are dishonest. Most of the time there is a real answer and you learn something about how the business runs.

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