What a Buyer Actually Looks At in Your Financials

Most owners think a buyer starts with revenue. Revenue is the first number they hear, but it is rarely the one that decides the deal. When I look at a company's financials for Creek Equity, I am trying to answer one question: how much of this business's earnings will still be here the year after the owner steps back?

Here is what I read first, in the order I read it.

1. Earnings, and what is inside them

Buyers usually talk about earnings before interest, taxes, depreciation and amortization, and then "adjust" that number for things that will not continue under a new owner. Your personal car, a family member on payroll who does not work in the business, a one-time legal bill.

Adjustments are normal. What hurts owners is a long list of them that nobody can support. Every add-back should have a short explanation and a document behind it. If you cannot explain an adjustment in one sentence, a buyer will assume it is not real.

2. Customer concentration

I want to know what share of revenue comes from your largest customer, your top five, and your top ten. A company with one customer at a third of sales is a different business from one with no customer above five percent, even if the totals are identical.

Concentration is not a deal killer. It is a risk that changes price and structure. If you have it, say so early, and show how long those relationships have lasted and whether they are under contract.

3. Gross margin over time

A single year's margin tells me very little. Three to five years tells me whether you have pricing power, whether costs are under control, and whether growth came from good work or from cutting price to win volume.

If margins moved, know why. A new product line, a supplier change, a big contract at a thin margin. A buyer will ask, and "I'm not sure" is an expensive answer.

4. Working capital and cash

Profit and cash are not the same thing. I look at how long it takes you to collect from customers, how long you take to pay suppliers, and how much inventory you carry. A business can show a profit and still need cash every time it grows.

Buyers will usually expect a normal level of working capital to be left in the business at closing. Owners who have never measured theirs are often surprised by what that means for the check they receive. Learn your number before the conversation starts.

5. Whether the books can be trusted

This is the one owners underestimate. I am not looking for audited statements from a small company. I am looking for books that someone other than you and your bookkeeper can follow: business and personal expenses kept apart, revenue recorded the same way every month, and tax returns that tie back to the statements.

Clean books shorten diligence, reduce the number of surprises, and keep a deal from being re-priced late in the process. Messy books do the opposite, even when the business underneath is good.

What you can do this year

You do not need a banker to get ready. A few steps make a real difference:

• Separate personal expenses from the business, starting now.
• Close your books every month, not once a year.
• Keep a running list of one-time costs and the paperwork for each.
• Track your top customers' share of revenue every quarter.
• Ask your accountant to walk you through your working capital, and write the answer down.

Why this matters to us

At Creek Equity we invest our own capital, not a fund's, so we have no deadline to sell what we buy. That changes how we read a company's numbers. We are less interested in how a business looks for one closing date and more interested in whether it will be healthy five and ten years from now. Owners who know their numbers make that easy to see.

If you own a Michigan business and want to talk through what a buyer would see in yours, with no obligation, write to me at scott@creekequity.com. If you have not yet, start with the five questions I would answer before calling any buyer.

Also published on Substack and LinkedIn.