How to read a business-for-sale listing

Most sales follow a similar sequence. A short public listing, sometimes called a teaser, gives enough detail to attract interest without naming the business. If you enquire, you are usually asked to sign an NDA before you receive an information memorandum with fuller figures and a description of how the business runs. After that come calls with the seller, an offer, and due diligence.

Each step takes more of your time, and the later ones cost money in advisers' fees. The listing is the cheapest point at which to rule a business out. So the aim of reading one is not to confirm that the business is good. It is to find the reasons it might not be, and to work out which of those reasons you can test before you commit time or money.

Keep three things in mind as you read:

• The figures are stated by the seller or broker and have not been verified.
• The listing is selective. What it leaves out is often more useful than what it says.
• The same business may appear on more than one site, sometimes with different figures or a different price.

A typical listing shows an asking price, revenue and a profit figure. Before you compare any of them, pin down what each one actually is.

Which profit figure

Listings use several profit measures, often without saying which. The ones you will meet most are:

• SDE (seller's discretionary earnings): profit before one working owner's pay and benefits, interest, depreciation and amortisation, with one-off and discretionary costs added back. It shows what the business earns for one owner who works in it.
• Adjusted EBITDA: roughly SDE after paying someone a market salary to do the owner's job. It is the usual measure for larger businesses that already have management.
• Net profit: what is left after all costs. Online marketplaces often price on net profit, which for a small online business can sit close to SDE when the owner draws no salary from it.
• "Cash flow" or "owner benefit": broker terms that usually mean SDE. Vaguer labels such as "adjusted profit" could mean either measure. Check rather than assume.

The same business can show very different figures under each measure. A profit figure of $300,000 means one thing if it is SDE and another if it is earnings after a manager's salary. If the listing does not say, ask. SDE and EBITDA explained builds both up line by line for two fictional businesses.

Which period

Check the period behind each figure. The most useful is the trailing twelve months, the 12 months up to the most recent month-end. Others you will see:

• the last completed financial year, which may be well over a year old by the time you read it
• a run rate, which takes a recent month or quarter and scales it up to a year, and flatters a business that had one strong period
• a forecast or "projected" year, which is the seller's expectation rather than a result

If revenue and profit are for different periods, or the latest year looks much better than the years before it, make a note. A single year of figures tells you nothing about the trend. Ask for three years plus the trailing twelve months.

Which currency and which business

For listings outside your home market, check the currency and whether the figures cover one company or a group. Some owners run two related businesses from the same premises and sell only one of them, while the listed figures blend both.

An asking price only means something once you know what it buys. Listings are often vague on this, and the differences can be large.

• Stock (inventory in the US). Some listings include stock in the price. Others say the price is "plus stock at valuation", often shortened to "plus SAV" in the UK, meaning you pay for stock on top. For a retailer or distributor, stock can be a large part of the total.
• Working capital. Will the business come with enough receivables and cash to trade from the first day, or will you need to fund that yourself? Working capital, inventory and what the price includes explains how this is usually agreed.
• Property. Owned premises may be included, offered separately or excluded. Folding the value of a building into a business price makes the business look more expensive than it is.
• Equipment. Vehicles and machinery on finance or lease may not belong to the business outright.
• Cash and debt. Larger deals are often priced cash-free, debt-free, where the seller keeps the cash and repays the borrowing. Smaller listings may not say.
• Structure. An asset sale and a share sale (a stock sale in the US) transfer different things, including different liabilities. Many listings do not say which the seller expects.
• Deferred payments. A headline price may assume part is paid later, through seller finance or an earn-out.

Divide the asking price by the profit figure to find the multiple the seller is asking for. Then do the same with revenue.

Here is a fictional example. Saltmarsh Coffee Roasters, an invented UK roastery, is listed at £600,000 plus stock. The listing shows revenue of £1,000,000 and "adjusted profit" of £200,000.

• Asking price divided by profit: £600,000 divided by £200,000 is 3.0 times.
• Asking price divided by revenue: £600,000 divided by £1,000,000 is 0.6 times.

Now the questions start. Is the £200,000 SDE or earnings after a manager's salary? If it is SDE and the owner works full time, a buyer who hires a manager at a total cost of £50,000 a year has earnings of £150,000, and the same price is 4.0 times that. Is the profit from the last financial year or the trailing twelve months? And stock is extra: if stock at cost is £80,000, you are paying £680,000 in total.

A multiple on its own is neither high nor low. It is a way to compare. Set it against similar businesses of a similar size, and against what your own analysis says the business is worth. Remember that other listings show asking prices too, and final sale prices usually land below asking prices, so a comparison with other listings tells you how a business is pitched rather than what it will fetch. How small businesses are valued explains why multiples vary with size and quality, and the free valuation tool gives an indicative range you can put next to the asking price.

The revenue multiple is a quick sanity check. Loupe's valuation tool flags an implied revenue multiple above 2.0 for any business other than software as a prompt to look more closely, because a price above twice revenue needs either very high margins or a very high earnings multiple to make sense.

Listing language follows its own conventions. Some phrases carry useful information. Others are there to soften a weakness. A few common ones, and what to ask about each:

• "Semi-absentee" or "under management". Ask who does what each week and what the manager is paid. If the manager's pay has been added back to profit, the business is not really under management at the price being asked.
• "Owner works 10 hours a week". Ask what those hours are spent on. Ten hours holding every important customer relationship matters more than forty hours of routine tasks.
• "Established" or "long-standing". Ask how long the current owner has run it, and whether the company has changed its name or structure along the way.
• "Loyal customer base". Ask what share of revenue comes from the largest customer and from the largest five.
• "Huge growth potential" or "untapped opportunities". This describes work the seller has not done. Be wary of paying for it up front.
• "Motivated seller" or "priced for a quick sale". Ask why, and how long the business has been on the market.
• "Retiring". Often true, and a perfectly good reason. Still ask how long the owner will stay to hand over and whether they will agree not to compete afterwards.
• "Add-backs available on request", or a large gap between net profit and the headline figure. Ask for the full add-back schedule early. Add-backs: which hold up and which do not shows how to test it.
• "Recession-proof" or "turnkey". Treat these as marketing rather than evidence.

Listings rarely say anything false outright. More often they leave things out. Look for the gaps:

• How revenue is spread. No mention of how many customers there are, or how much depends on the largest. See one customer above 20% of revenue.
• Who does the work. Staff numbers without roles, or no mention of what the owner does. See the owner does the selling or holds key relationships.
• The trend. Only one year of figures, or revenue shown without profit.
• Premises. Nothing about the lease, how long it has left or whether the landlord must consent to a transfer. See a lease ending soon or needing landlord consent.
• Licences and permits. Regulated trades such as care, food, alcohol, transport and financial services can depend on licences, registrations or approvals that are held by the owner personally or cannot simply pass to a new owner. See licences or permits that do not transfer.
• The reason for sale. No reason given, or one that does not quite fit the rest of the story. See a vague reason for sale.
• For online businesses: where the traffic comes from, how much depends on one platform, and whose name the domains and accounts are in. See traffic reliant on one search engine and domains or accounts held in personal names.

A gap is not proof of a problem. Confidentiality means some details, such as the business name or exact location, are rightly held back until after an NDA. The point is to write down what you need to know and ask for it in a sensible order.

How a listing has changed over time tells you something the text does not.

• Time on the market. A business listed for a long time, or taken down and relisted, may be overpriced or may have a problem that put earlier buyers off. See repeated relisting or a long time on the market.
• Price changes. A price cut is not bad news in itself, but ask what prompted it.
• Different figures in different places. The same business listed by two brokers, or listed a year ago with other numbers, is worth noticing. Loupe's feed shows a business found on several sources as one listing and keeps a change history, including price changes and relistings, which makes this easier to spot.
• Figures that change later. If the information memorandum shows lower revenue or profit than the teaser did, ask why before going any further. See figures that change between the teaser and later documents.

By the end of a first read you should have a short list: what you know, what you do not know, and what would rule the business out. A simple order works well.

1. Confirm the basics: which profit figure, which period and what the price includes.
2. Calculate the implied multiple on the stated profit, on profit after a manager's salary and on revenue.
3. List the gaps: customers, the owner's role, the trend, premises, licences and the reason for sale.
4. Decide which gaps would end your interest, and ask about those first.

The twenty-minute listing screen turns this into a checklist, and questions for the first seller call covers what to ask next. The free red flag screen asks you around 15 quick questions about a listing and shows which areas need attention.

Some of what a listing leaves out can be checked without the seller at all: the company registry, domain history, reviews and web traffic trends. A Loupe dossier does that work and restates the listed figures on a consistent basis, before you sign an NDA or pay an adviser. What's in a dossier sets out the sections. Whichever route you take, treat every figure in a listing as a claim to be tested, and take advice from a qualified accountant or lawyer before you commit to a purchase.