The Buyer’s-Eyes Checklist

A buyer decides what your business is worth in the first ten minutes he spends in your books. Here’s the whole list he runs, so you can run it on yourself first.

Most business owners get one shot at their exit. One.

And the man across the table has done this thirty times. He has a checklist. You don’t.

That’s the entire fight, right there. He walks in knowing exactly what he’s looking for and exactly what each answer costs you. You walk in hoping he likes the place.

So here’s his list. All of it. Not the highlights, not three teaser bullets. Every category a buyer works through before he tells you a number, and what each gap does to your price when he finds it.

Print it. Sit down with it on a Saturday morning. Answer honestly, because the only person you can fool is yourself, and he’s going to find out anyway.

1. The books

He starts here, and he starts here for a reason. If your financials are a mess, everything else you tell him becomes a story he can’t check.

• Do you have three full years of profit and loss statements plus year to date?
• Do you have balance sheets for the same periods?
• Do your tax returns tie to your P&L, and can you explain every difference?
• Are your books on accrual, or are you on cash basis and calling it accounting?
• Do you close the month within fifteen days, every month?
• Are personal expenses run through the business identified, listed and supportable?
• Is your revenue recognized the same way in every period, or did the method drift?
• Does your accounts receivable aging match the balance sheet?
• Do you know your gross margin by product line or by service, not just in total?
• Has a CPA reviewed or compiled these statements, or did they come straight out of QuickBooks untouched?
• Can you produce a monthly P&L for thirty-six straight months without going back to your bookkeeper?

What he’s really asking: can I trust the number at the bottom, and how much am I going to have to discount it because I can’t?

2. The add-backs

Every owner has add-backs. The car, the phone, the trip that was mostly a conference. You add them back to earnings because they aren’t real costs of running the business, and the buyer’s analyst spends an afternoon striking the ones that are.

Here’s the uncomfortable truth about add-backs. The ones you’re proudest of are usually the first ones he kills.

• Do you have a written add-back schedule, line by line, with a dollar amount on each?
• Can you produce a document for each one? An invoice, a statement, a K-1, something?
• Is your own compensation stated, and do you know what a qualified manager would cost to replace you?
• Are family members on payroll who don’t work in the business, and are they identified?
• Are one-time legal, settlement or startup costs separated from the recurring ones?
• Is rent paid to yourself or a related entity, and is it at market?
• Have you added back anything that happens every year? Because a cost that recurs isn’t a one-time item, no matter what you call it.
• Would you be comfortable defending every line on that schedule under questioning?

What he’s really asking: how much of this adjusted number is real earnings and how much is wishful thinking?

3. Customer concentration and revenue quality

Two businesses, same revenue, same profit. One gets four times earnings, the other gets seven. The difference is almost always here.

• What percentage of revenue comes from your largest customer?
• What percentage comes from your top five?
• Is any single customer more than fifteen percent of revenue?
• How much of your revenue is contracted or recurring versus won again every year?
• Are those contracts in writing, signed, and current?
• Do the contracts survive a change of ownership, or does the customer get to walk?
• What’s your customer churn, in a number, for each of the last three years?
• How long has your average customer been with you?
• When did you last raise prices, and what happened when you did?
• Does your biggest customer have a personal relationship with you, or with the company?
• Would your top ten customers still be there twelve months after you left?

What he’s really asking: if I buy this and you disappear, how much of the revenue disappears with you?

4. Owner dependency

The whole game. A business that owns the owner is a job with a payroll attached, and buyers don’t pay top dollar for a job.

• How long can you be gone before something breaks? A week? A month? A quarter?
• When did you last take two consecutive weeks off without calling in?
• Who signs the checks besides you?
• Who closes a sale besides you?
• Who solves the hard customer problem besides you?
• Who knows the vendor relationships besides you?
• Are you personally licensed or certified in a way the business needs to operate?
• Is your name on the door, the trucks, or the brand?
• How many boxes on your org chart have your name in them?
• If you were hit by a bus tomorrow, who runs it Monday, and does that person know it?
• Is there anything you do that isn’t written down anywhere?

If you want a faster read on this one section, the sixty second assessment scores it for you.

What he’s really asking: am I buying a business or am I buying you?

5. The team

• Do you have an org chart, current, with names in the boxes?
• Who are the three people the business can’t lose, and do you know what they’d do in a sale?
• Are key employees under written agreements?
• Do you have non-solicitation and confidentiality agreements in place, signed and current?
• Is anybody paid meaningfully below market, so the buyer inherits a raise he didn’t budget?
• Do you have written job descriptions?
• Is there a second in command who could run daily operations for ninety days?
• Are your workers properly classified as employees or contractors?
• Are your I-9s and personnel files complete?
• What’s your turnover rate, and can you state it?
• Is there a bonus or incentive plan, and is it written down?

What he’s really asking: does the machine keep running after closing, and what’s it going to cost me to keep the people who make it run?

6. Systems and documentation

• Are your core processes written down, step by step, so a new hire could follow them?
• Do you have a CRM, and is it current, or is the pipeline in your head?
• Is your customer list exportable and complete?
• Do you track anything weekly, on paper, that tells you the business is healthy?
• Is scheduling, dispatching or production run on a system anybody can pick up?
• Are your passwords, logins and domain registrations in one controlled place under company ownership?
• Do you have written pricing, or do you quote from experience each time?
• Is your quality or rework rate measured?
• Are vendor terms and preferred pricing documented, or are they handshake?

What he’s really asking: can I hand this to a manager, or does it only work because you’ve been doing it for twenty years?

7. Contracts and suppliers

• Do you have signed, current copies of every material contract?
• Do your contracts allow assignment to a buyer, or do they require consent?
• How many of them contain a change of control clause?
• What percentage of your supply comes from a single vendor?
• Do you have a second source for anything critical?
• Are your supplier prices locked, and for how long?
• Are there exclusivity, territory or most favored pricing terms buried anywhere?
• Is your lease assignable, and how long is left on it?
• If you own the real estate, have you decided whether it sells with the business or gets leased back?
• Are there personal guarantees on any of it, and do you know how they get released?

What he’s really asking: what breaks the day the name on the paperwork changes?

8. Corporate housekeeping

The least interesting section on this list and the one that has delayed more closings than anything else here. Nobody loses a deal over minute books. Plenty of people lose sixty days.

• Is your entity in good standing with the state?
• Do you have a complete minute book, or a company agreement with resolutions and consents?
• Can you produce a clean ownership record showing who owns what, today?
• Do all owners agree, in writing, on how a sale gets approved?
• Is there a buy-sell agreement, and does it still say what you think it says?
• Are all licenses and permits current and in the company’s name?
• Do you own your trademarks, logos, domain names and software licenses, or does a former contractor?
• Is any intellectual property registered, and is it registered to the company?
• Are there liens, UCC filings or judgments outstanding?
• Is there pending or threatened litigation, and have you told anybody about it?
• Are federal, state and local taxes filed and paid, including sales and payroll?
• Are there environmental issues on any property you own or use?

What he’s really asking: how many surprises are hiding in the file cabinet, and how long will it take my lawyer to dig them out?

9. Assets, capital spending and working capital

• Do you have a current fixed asset list with age and condition on each item?
• What capital spending have you deferred, and what does catching up cost?
• Is your equipment maintained on a schedule, with records?
• Is your inventory accurate, counted, and free of obsolete stock still carried at full value?
• What are your days sales outstanding, and are you effectively financing your customers?
• Do you know your normal working capital requirement across a full year?
• Is any of your equipment leased, and do those leases transfer?
• Are your technology and software current, or is a replacement cycle about to land on the buyer?

What he’s really asking: what do I have to spend on day one that isn’t in the purchase price, and how much cash does this thing need to run?

10. The growth story

Every seller has one. Almost none of them are documented, and an undocumented growth story is worth exactly nothing at the negotiating table.

• Can you show three years of revenue and margin trend, and explain every move?
• Do you have a pipeline you can show him, with names and dollars in it?
• Do you know where your customers come from, by source, with numbers?
• Can you prove the marketing works, or do you believe it works?
• Is there a market or a service line you’ve deliberately left on the table, and can you size it?
• Do you know your competitors and what they charge?
• Is your growth story built on you personally selling more, or on something a buyer can run?

What he’s really asking: am I paying for growth that already happened, or for growth I’ll have to create myself?

11. The data room

The last one, and the one that separates the deals that close in ninety days from the ones that grind for nine months. He’ll ask for all of it within a week of signing a letter of intent. Every day you spend hunting for a document is a day he spends reconsidering the price.

• Financial statements, three years plus year to date
• Tax returns, three years, business and any related entities
• The add-back schedule with supporting documents
• Accounts receivable and accounts payable aging
• Customer list with revenue by customer
• All material customer and supplier contracts
• Leases, real property and equipment
• Employee census, agreements, and the org chart
• Insurance policies and the loss run history
• Corporate records, ownership, licenses and permits
• Bank statements and loan documents
• Fixed asset list and inventory detail
• Any litigation files, open or closed in the last five years

What he’s really asking: nothing. He stopped asking. He’s watching how fast you produce it, and he’s drawing a conclusion about how the rest of this deal is going to go.

Score it

Count your no answers.

What he does about each gap

Owners assume a problem shows up as a lower price. Sometimes it does. More often it shows up as structure, which costs more and hurts longer.

• Messy books. A quality of earnings review, on your dime or his, and a price that moves down when it comes back.
• Undocumented add-backs. Struck from earnings. Every dollar struck comes out multiplied.
• Customer concentration. A lower multiple, and often a piece of the price tied to that customer still being there a year later.
• Owner dependency. An earnout. Two or three years of you staying on, at a salary somebody else sets, with your money riding on numbers somebody else now controls.
• Weak team, no bench. Retention bonuses funded out of your proceeds, and a longer transition than you agreed to in your head.
• No systems. A consulting agreement that keeps you available, and a buyer who calls more than you expected.
• Contracts that don’t assign. Closing conditions. Consents you have to go get, from customers who now know you’re selling.
• Housekeeping gaps. Delay, legal fees, and an indemnity that survives the closing for years.
• Deferred capital spending. A dollar for dollar reduction in price, and he’ll be generous with his estimate.
• Slow data room. Escrow. Twelve to twenty four months of your price held back, released only if nothing surfaces.

Read that list again and notice something. Almost none of it is a lower number on the front page of the offer. It’s the back half of the deal, where the money actually lives, and it’s where owners who only negotiated the headline price get taken.

What to do with your no answers

Take the ten worst. Put a name and a date on each one. Work them in the order of what a buyer discounts hardest, which on almost every list I’ve seen means owner dependency first, books second, concentration third.

You have more time than you think and less than you’d like. The owners who get the top of the range aren’t the ones with the best business. They’re the ones who ran this list three years before they needed to.

I’ve spent 38 years on both sides of these tables and closed over $250 million in transactions, from $1.5 million to $45 million. Every deal on that list turned on something you just read.

Find out what it’s worth today

You’ve now got an honest picture of what a buyer will find. The next question is the one that keeps owners up at night. What’s the number?

For $499 I’ll build you a valuation report on your actual financials, using the same methodology I use when I’m representing a seller for real money. You get a range, a confidence rating, and a straight answer about which parts of this checklist are costing you the most.

Frequently Asked Questions

What is a buyer’s-eyes checklist?

The list a buyer and his advisors work through before they tell you what your business is worth. Financial quality, add-backs, customer concentration, owner dependency, the team, systems, contracts, corporate records, assets, the growth story, and how fast you can produce documents. Running it on yourself first is the cheapest diligence you will ever do.

How long before a sale should I run this?

Three years is ideal. Two is workable. One is triage. Most items on this list take a year or more to fix in a way a buyer will credit, because he wants to see the fix reflected in the numbers, not just described to him.

What hurts my price the most?

Owner dependency, almost every time. A business that only works because you’re in it is a business a buyer has to keep you in, and the tool he uses for that is an earnout that turns your sale into an employment agreement.

How much customer concentration is too much?

Once a single customer passes fifteen percent of revenue, buyers start pricing it. Past twenty five percent it becomes a structural issue, not a discount, and you’ll usually see part of the price tied to that customer sticking around after closing.

Which add-backs actually survive?

The documented, non-recurring, clearly personal ones. Your car, your health insurance, a one-time legal matter, above-market rent to yourself. What gets struck is anything that happens every year, anything you can’t document, and anything that turns out to be a real cost of running the business wearing a different name.

Do I need audited financial statements?

Most businesses in the range I work in don’t. What you need is books that tie to your tax returns, close on a schedule, and can be explained. A buyer will run his own quality of earnings review either way. The question is what he finds when he does.

What if I score badly?

Then you found out from a checklist instead of from a buyer, which is the entire reason to run it. A bad score three years out is a work plan. The same score during diligence is a price reduction.

Does a clean checklist guarantee a higher price?

No. Multiples turn on industry, size, growth rate, deal structure, customer mix, and what one specific buyer wants on one specific day. What a clean checklist does is remove his reasons to discount you, and reasons to discount are what he came in with.

The material on this page is general information about how businesses are bought, sold and valued. It isn’t legal advice, and reading it doesn’t make me your lawyer. Every business is different, and the details are where the money is.

James Montgomery. 38+ years representing owners of privately held companies. Over $250 million in closed transactions.