Start by requesting the right documents. You need at least three years of tax returns, profit and loss statements, balance sheets, and bank statements. Some sellers will offer a summary or a single year of data. That’s not enough. Patterns matter more than any single year, and you need multiple sources to cross-reference.

Compare the tax returns to the profit and loss statements. They should tell the same story. If the P&L shows $400,000 in revenue but the tax return shows $320,000, someone is either underreporting income to the IRS or inflating numbers to impress buyers. Neither is good. Bank deposits should roughly match reported revenue after accounting for timing differences.

Sellers often present “adjusted” or “normalized” earnings. This is where they add back expenses they claim a new owner wouldn’t have. Owner salary above market rate, personal vehicle expenses, family members on payroll who don’t really work there, one-time legal fees. Some add-backs are legitimate. Others are creative accounting to inflate the asking price. Question every adjustment and ask for documentation.

Look at revenue trends across all three years. A business showing flat revenue might actually be declining if you account for inflation and price increases. A business with growing revenue but shrinking margins has a different problem. The seller will highlight the best numbers. Your job is to see the whole picture.

Examine customer concentration. If 40% of revenue comes from one client, you’re not buying a business. You’re buying a relationship that might not transfer to you. Ask for a customer breakdown and think about what happens if the largest accounts leave after the sale.

Check accounts receivable aging. Old receivables that haven’t been collected may never be collected. If the seller includes $50,000 in receivables as part of the deal, but $30,000 of that is over 90 days old, adjust your valuation accordingly.

Understand working capital needs. Some businesses require significant cash to operate because they carry inventory or have long collection cycles. The purchase price is just part of what you’ll need. Make sure you know how much operating cash the business requires to function.

Review the balance sheet for hidden liabilities. Outstanding loans, equipment leases, pending legal matters, deferred revenue that represents obligations to customers. These don’t always show up in conversations with sellers but they transfer to you after closing.

Owner compensation deserves special attention. Many small business owners pay themselves whatever the business can afford rather than a market salary. If the owner takes $50,000 but you’d need to hire a manager at $90,000 to replace them, the business makes $40,000 less than the P&L suggests. Work through what the business actually earns under normal operating conditions.

Get professional help with business purchase analysis. Sellers have accountants and brokers working for them. You should have someone working for you who can spot inconsistencies, verify figures, and tell you whether the asking price makes sense. The cost of due diligence is small compared to the cost of buying a business that isn’t what it appeared to be.

If you’re in the Los Angeles area and need help analyzing a potential acquisition, working with San Gabriel Valley QuickBooks bookkeepers who understand small business financials can make the difference between a good investment and an expensive mistake.