Revenue patterns tell you a lot. Look for declining sales over the past two to three years that the seller explains away with temporary factors. Check customer concentration because if one or two customers represent more than 30% of revenue, you’re buying a business that could collapse if those relationships don’t transfer. Cash-heavy businesses need extra scrutiny because unreported cash sales mean you’re paying for revenue that doesn’t officially exist.

Personal expenses running through the business are common in small companies. The owner’s car, phone, meals, travel, and sometimes even home expenses show up in the books. Sellers often present “adjusted EBITDA” that adds these back to show higher profit. Some adjustments are legitimate. Others are creative accounting to inflate the purchase price. Ask for documentation supporting every adjustment.

Be suspicious of sudden improvements in the months before listing. Expenses dropping sharply, margins improving dramatically, or revenue spiking right before a sale suggests the seller staged the financials. A business that ran 15% margins for five years then hit 22% in the last six months deserves questions about what changed.

Compare tax returns to the financial statements the seller provides. Business purchase analysis should always include this step because sellers rarely overstate income to the IRS. If the internal financials show $500,000 profit but tax returns show $300,000, find out where the gap comes from.

Receivables aging matters. Old receivables that have been sitting unpaid for 90 or 120 days probably won’t be collected. If the seller values the business based on assets including uncollectible receivables, you’re overpaying. Same logic applies to inventory. Obsolete stock sitting in a warehouse has minimal actual value regardless of what the balance sheet says.

Missing documentation is its own red flag. A seller who can’t produce bank statements, contracts, or source documents for major transactions either has something to hide or runs a disorganized operation. Both scenarios create risk for you as a buyer.

Working with an LA County bookkeeper for small business acquisitions means having someone who knows where problems typically hide in small company financials. A few hours of professional review often uncovers issues that save you from a bad deal or give you leverage to negotiate a better price.