A seller told me once that his business brought in 108 percent of its annual earnings in December. The other 11 months lost 8%.

Not a typo.

The year ended in the black – technically. But the actual mechanics of that business, month to month, were: burn cash, burn cash, burn cash, hold your breath in November, and pray December shows up the way it did last year.

I want to sit with that number for a second, because it tells you almost everything about how to actually read a deal, and it tells you almost nothing about what the seller thinks they should get paid for it.

Price and quality are supposed to travel together, but the gap between the two is where I’ve watched more buyers get hurt than anywhere else in the process.

The instinct early on is to go hunting for the deal that looks cheap. A seller under some kind of pressure. A number that comes in under what the broker’s own materials suggest it should be. The logic feels airtight: pay less, risk less. It’s clean. It’s satisfying. But more often than not, this is completely backwards.

 

1. When one customer is the whole business

I always start here, because customer concentration is the fastest tell in any set of financials, and it’s the one people underestimate the most.

A business doing a million dollars in revenue, and it turns out one customer is the whole million. That’s not a business. It’s a single contract with a logo and a bank account attached to it.

Two customers splitting it 50/50, marginally better, still not good.

And here’s the one that gets people: a hundred customers, looks diversified, feels safe, except one of them is 35 percent of revenue. That’s still a countdown clock. That one customer’s renewal meeting is, functionally, your renewal meeting too.

Now here’s the part that’s actually interesting to me. I’ve sat across the table from operators who saw this coming years before they ever thought about selling, and quietly, deliberately, spent three years bringing that number down. They did that by growing everybody else faster than the big account was growing.

So when I find a business with concentration under 10%, I’m paying a premium because of the three years of somebody’s discipline that already happened, well before I ever walked in the door.

 

 

2. Steady cash flow over seasonal

Back to the December business for a minute, because it’s the cleanest example of the opposite failure mode. This isn’t ordinary seasonality, where July’s slow and October’s strong and it evens out. This is a business that exists for one month and merely tolerates its own existence for the other eleven. Which means the owner has to carry enough working capital to survive almost a full year of losses, on faith that the calendar bails them out again.

One bad December, and the whole year folds in on itself.

Now compare that to a business where earnings hold steady month over month, or even tick up slightly. No drama. That business isn’t hoarding cash against its own unpredictability, because there isn’t any.

It can reinvest sooner.

It can absorb a bad month without anyone losing sleep.

It can grow without waiting for permission from a specific week in Q4.

Recurring revenue is the extreme end of this, where the same customers are paying you the same amount whether or not anything interesting happened that month. It’s the thing I’ve watched the most conservative capital in the room ask about first, and it’s not because recurring revenue is exciting.

Recurring revenue is boring because it removes an entire category of guesswork from the underwriting.

Boring is exactly what you want your cash flow to be.

 

3. No systems. Just a really busy owner

This next one is harder to see because it doesn’t show up as a line item anywhere. I once sat down with an owner and just started asking questions.

Who finds the clients? Him.

Who delivers the work? Him.

Who keeps the relationships warm? Also him.

 

 

And I remember thinking: there’s equipment here, there’s real revenue here, and this man sincerely believes he has a business to sell.

What he actually had was a very well-paying job, dressed up to look like a company. I told him to liquidate. Nobody was going to pay him for a system, because there was no system. There was just him.

Compare that to a business where the sales and marketing engine runs whether or not the owner shows up that week. When that exists, and it’s documented, and it’s actually working, I’m not buying the hope that growth is possible. I’m buying someone else’s years of trial and error, already proven, at a discount to what it cost them to build it.

 

4. Urgency is the enemy of quality, almost every time

This is the one that trips people up the most, because it runs against every instinct. The deals that look like steals, where the CPA calls on a Tuesday saying the widow needs to close by Friday, are usually exactly that.

Something has already been taken out of that business before you ever got the call: death, disability, divorce, drugs, disaster – the five Ds.

 

 

They produce fast, cheap transactions, if you can move and you have cash sitting there. But in my experience, they’re also reliably the conditions under which nobody’s been managing customer concentration or smoothing cash flow or building a sales process for the last two or three years, because there were bigger things happening in that person’s life.

 

5. Clean financials mean there’s nothing left to explain away

The businesses that sit at the top of their fair range are the ones being sold on the seller’s own timeline, by someone who spent years preparing the exit with the same care they built the company. Typically that means financials will be clean enough that the tax returns and the internal numbers match without an explanation. Sometimes audited outright, because an owner with nothing to explain away has no reason to avoid the scrutiny.

None of this takes inside information. Every one of these five traits is sitting right there in the financials, for anyone willing to look past the number at the top of the page: customer concentration, steady cash flow, low key man risk, avoiding the 5 Ds, and clean financials.

The businesses at the top of their range aren’t expensive because someone got a good broker or timed the market well. They’re expensive because somebody spent years doing the boring, invisible work of removing the very things that make a business hard to own.

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