What to Look for in a Business… Before You Make an Offer
(The Pre-LOI Gut Check)
When you’re shopping for a business to buy, it’s easy to get excited about the possibilities. But before you start talking Letters of Intent (LOIs) and counting your future earnings, you need a sniff test - a way to decide whether a business is even worth your initial interest.
Exactly what you look for can be personal. An industry veteran might see gold in a customer list and shrug at operational chaos (“I know how to fix that!”). A newcomer to the field might see the same situation as a nightmare.
That said, here are relatively universal factors I look for in the pre-LOI stage.
Owner Involvement
How much does the business depend on the current owner’s personal touch?
Will customers disappear when they do?
Are systems and processes documented, or locked in the owner’s head?
Is there a leadership team behind the owner? Or is this a one-person show?
High owner reliance isn’t unusual in small businesses, but it can be risky. You may need a longer transition period or an earnout to reduce that risk.
Key Employees
Speaking of the leadership team… do certain employees hold the keys to major revenue or operations? If they leave, does the business take a hit?
Retention bonuses or other incentives can go a long way toward keeping them on board during and after the transition.
Customer Concentration
Big customers can be great. They can also hold the business hostage.
This is a rough number, but if any one client accounts for more than 20% of sales, that’s a yellow flag, and I’m digging deeper. Not a deal-breaker, but something you’ll want to investigate and consider in your deal structure.
Key Contracts
Are there customer or supplier contracts in place? If so, do they include a change-of-control clause that could force you to re-tender them after closing? Any government programs/approvals that won’t automatically transfer to a new owner?
It’s better to know this before you start dreaming about recurring revenue.
Financial Stability
Review at least five years of financials if possible. Look for stability or growth in revenue and earnings.
Big swings aren’t always bad, but they can be dangerous when you’ve got acquisition loan payments to make every month.
Lease Term
Leases can be silent killers. With commercial rents rising dramatically, you don’t want a renewal surprise six months into ownership.
If location matters, aim for five years of rent stability - or negotiate an extension before closing.
Seller Vibe
You’ll likely work closely with the seller for months during due diligence and post-closing.
Do you trust them? Do you actually like them?
Your gut feeling matters more than you might think.
Industry Outlook
Is the industry growing, stagnant, or declining?
You can make money in a flat or shrinking market, but you’ll be fighting competitors tooth and nail. It’s easier to succeed with some tailwinds at your back.
The Bottom Line:
Most of these factors aren’t deal-killers on their own. But every one of them carries risk - and the earlier you spot them, the better you can structure your deal to handle them. And if a deal faces a few of these challenges… well, it may make sense to “pass”.
Pre-LOI screening isn’t so much about finding the perfect business. It’s about dodging the landmines.”
Disclaimer: I am (thankfully) not a lawyer, nor am I an accountant. If any of this sounds like legal/financial advice, it's not. Take everything I say with a grain of salt. But not too much - I hear it's bad for your blood pressure.
