But smart buyers know that P&Ls and tax returns only show the surface. The real value (or risk) often hides in what those numbers don’t say.
This post is your guide to reading between the lines of a small business valuation.
1. Stable revenue? Check customer sources.
A business might show consistent sales, but where that money comes from matters more than how much there is. Look deeper:
- Is revenue spread across many customers, or concentrated in just a few?
- Are clients locked into contracts, or leaving anytime?
- Is growth tied to one lead source (like paid ads or referrals)?
Example:
A buyer picked up a $600K agency with impressive books... until their largest client (who made up 70% of revenue) walked six months later. Diversification was the missing detail.
What to ask:
- Who are your top 5 customers by revenue?
- How long have they been with you?
- How do new customers usually find you?
2. Profit margin? Look at owner perks.
Don’t take net profit at face value. Many small business owners blend personal and business expenses or underpay themselves.
What you might find:
- Personal car lease or meals on the books
- Family on payroll (but not working)
- Owner working 60 hours/week for $40K
These adjustments are common in a small business valuation, but you need to normalize them.
Tip: Ask for an “add-back schedule” or create one with your deal team to calculate true owner earnings (SDE or adjusted EBITDA).
3. Clean books? Zoom out on the timeline.
Even tidy financials can hide seasonal swings or temporary boosts.
Always check:
- Year-over-year trends (3+ years if possible)
- Monthly breakdowns to spot dips or spikes
- Any recent changes (new services, pricing, staff)
4. Consistent sales? Look at the systems behind them.
Strong revenue is great, but how much of it depends on the current owner?
Look for signs like:
- No SOPs or training docs
- Owner handles all quoting, sales, or customer service
- Team is unclear on roles or responsibilities
If the owner is the system, you’re not just buying a business—you’re buying a job.
5. Positive cash flow? Check working capital needs.
Some businesses look profitable but eat up cash due to slow payments, inventory cycles, or payroll timing.
Ask:
- How long does it take to get paid after a sale?
- Do you need to buy inventory upfront?
- Are there seasonal cash crunches?
Bonus: Ask “what would break if I doubled this business?”
You’re not just buying what exists—you’re buying what could be. So ask yourself:
- Would systems scale?
- Would the team hold up?
- Would the owner’s role become a bottleneck?
If the answer is “not yet,” that’s not a dealbreaker. But it is a plan.
Look deeper in your small business valuation
Financials are your map, but they’re not the full terrain. To make a sound acquisition, a small business valuation requires reading between the numbers—spotting customer risk, owner dependency, and systems gaps.
At SMB.co, we help buyers evaluate not just the numbers, but the full picture. Looking for a small business where the story makes sense? Browse businesses on SMB.co and discover what’s possible.
