How to read a business-for-sale listing in ten minutes

A listing for a business is an advert. It is written by the seller or their broker, and its job is to get you to ask for more. That does not make it dishonest. It does mean the most useful facts are usually the ones left out.

You can learn to read one quickly. Ten minutes is enough to decide whether a business deserves an hour. An hour is enough to decide whether it deserves a month.

Start with the three numbers

Every listing gives you some version of three figures. Find them first.

The profit figure needs the most care. Small businesses are usually sold on seller's discretionary earnings (often shortened to SDE) or on adjusted EBITDA. Both add back costs the seller says a new owner would not have, such as the owner's own salary, a family member on the payroll or a one-off legal bill.

Add-backs are normal. They are also where optimism lives. If the adjusted profit is far above the profit in the filed accounts, ask for every add-back as a list with evidence. A seller who can give you that list within a day is a seller who has prepared properly.

Work out the multiple

Divide the asking price by the profit figure. That is the multiple.

A business earning £200,000 a year and asking £600,000 is priced at three times earnings. The multiple is only a starting point, but it lets you compare one listing with another. Small owner-run businesses tend to sell for low single-digit multiples of the owner's earnings. Larger companies with management in place, contracts and recurring income sell for more.

If a listing shows a price well above what similar businesses fetch, there are only three explanations. The business is exceptional, the profit figure is generous, or the seller is testing the market. The listing will not tell you which.

Ask who does the work

This is the question that decides most small deals.

If the owner is the business, you are not buying a business. You are buying a job, and paying a multiple for it. Look for the signs:

• The listing says "owner works full time" or does not mention staff at all.
• Customers are described as "loyal" or "long-standing relationships". With whom?
• There is no manager, no second in command and no written process.

None of this rules a business out. It changes the price and the plan. A business that depends on its owner needs a long handover, and part of the price should be paid over time rather than on day one.

Look for concentration

Find out how much of the revenue comes from the largest customer, and from the largest three. A listing rarely states it. Ask in your first message.

If one customer accounts for a third of sales, you are buying a contract as much as a company. Read that contract before anything else. Check whether it can be ended on a change of ownership.

The same applies to suppliers, to a single salesperson who brings in most of the work, and to one platform that sends most of the leads.

Find out why they are selling

"Retirement" is the most common reason given, and it is often true. It is also the easiest to check. A seller who is retiring will normally agree to stay for a handover and to leave part of the price to be paid later. A seller who wants every pound on completion and no further involvement is telling you something.

Other honest reasons include ill health, a move, a partnership ending and an owner who is simply tired. Reasons that deserve a harder look: "pursuing other opportunities", a sale within two years of buying, and any hurry.

Five reasons to walk away early

1. The seller will not share accounts for the last three years once you have signed a confidentiality agreement.
2. Revenue has fallen for two years running and the listing does not mention it.
3. The profit only exists after add-backs you cannot verify.
4. The price includes "potential". You pay for what the business earns now. Growth you create belongs to you.
5. You do not understand how the business makes money after reading everything twice.

What to do with a listing that passes

Send a short message. Say who you are, how you would fund a purchase and what you need to see next: three years of accounts, the last twelve months of management figures, the add-back schedule, a customer breakdown and a staff list with roles. Serious sellers respond well to serious buyers.

Then do the slower work. Compare the figures you are given with the accounts filed at the companies registry. Speak to an accountant before you make an offer, and a solicitor before you sign one.

A good listing earns a conversation. Only the evidence earns an offer.