Buying a business might be one of the biggest financial decisions you’ll ever make. Unlike starting from scratch, you’re stepping into something with existing customers, revenue streams, operational systems, and (hopefully) profits. But you’re also inheriting any hidden problems, unsustainable practices, or looming challenges the current owner might not be eager to highlight.
That’s why due diligence matters so much. And yet, most potential buyers find themselves drowning in paperwork, spreadsheets, and reports—uncertain which numbers actually matter and which are just noise.
At our firm, we specialize in advising buyers and helping them professionalize new acquisitions through data analysis and optimized back-end processes. After guiding numerous clients through this journey, what we’ve discovered might surprise you: you don’t need to review hundreds of documents to make a smart decision.
In fact, there’s a remarkably small set of financial documents that can tell you almost everything you need to know about a business’s health, sustainability, and growth potential.
Here’s the good news: you don’t need to get buried under mountains of paperwork. In fact, there are just four essential pieces of data you should request from any seller:
- Three years of detailed income statements
- All corresponding balance sheets
- Three years of sales pipeline history (exportable from your Customer Relationship Manager [CRM])
- Sales transaction data (exportable from QuickBooks or any other accounting tool)
That’s it. Really.
With just these four documents, you can uncover an incredible wealth of information about the business you’re considering.
20 Critical Insights You Can Extract From These Documents
Let’s break down what you can learn from analyzing these four key documents:
Customer Analysis
- Customer concentration percentage: Are they dependent on just a few big clients?
- Customer ranking by revenue: Who brings in the most money?
- Geographic distribution of customers: Visualize where their business comes from
- Customer acquisition cost (CAC): How much do they spend to get a new customer?
- Average customer lifetime value (LTV): How much is each customer worth long-term?
Financial Health
- Revenue breakdown: Complete picture of COGS, gross margin, operating expenses, and earnings
- Year-over-year financial comparison: How are revenue, COGS, and SG&A trending?
- Current assets breakdown: What’s in accounts receivable, inventory, and cash?
- Current liabilities breakdown: Understanding short-term credit, taxes payable, and long-term liabilities
- Working capital calculation: Do they have enough to operate?
- Current ratio (assets to liabilities): Basic measure of financial health
- Gross margin percentage: How profitable is their core business?
Revenue Trends
- Revenue and margin trends over time: Track monthly performance
- Revenue trend analysis: Identify peaks and valleys
- Percentage distribution across customer segments: Which markets drive their business?
Sales Pipeline
- Sales pipeline stages with expected booking values: From mutual interest to commitment
- Number of transactions at each pipeline stage
- Pipeline conversion percentages by stage: How efficiently do they move prospects through the funnel?
- Amplified booking amounts at each sales stage
Expenses
- Detailed expense breakdown: Understand spending across advertising, bank charges, business development, and other categories
The Bottom Line
Don’t let sellers overwhelm you with unnecessary data. These four documents give you everything needed to make an informed decision about a business acquisition.
Armed with these four critical data sources, you’ll be able to:
- See beyond the surface numbers to understand the true financial health of the business
- Identify red flags that might not be obvious in high-level financial summaries
- Evaluate sustainability by examining customer concentration and dependency risks
- Assess growth potential through pipeline analysis and conversion metrics
- Understand operational efficiency by analyzing expense breakdowns and margins
- Make data-driven negotiation decisions with concrete figures backing your position
Remember, sellers often present their business in the most favorable light. These raw financial documents don’t lie—they tell the unvarnished story of the business’s performance, challenges, and opportunities.
The real value comes not just from having these documents, but knowing how to analyze them. While this blog post outlines what you can learn, the depth of insight comes from proper analysis. If you’re not comfortable with financial analysis, consider working with an advisor who specializes in business acquisitions to help you interpret what these numbers really mean for your potential purchase.
In the end, an informed buyer is a confident buyer. And a confident buyer makes better deals.
