Buying a business: the buy side playbook

Buying a business is one of the most direct routes to creating value, and one of the least well prepared. Many buyers spend months hunting for the perfect target, then sign under the pressure of a deadline without ever truly understanding what they are buying or how they are paying for it. This guide is written for individual buyers, for owners of SMEs and startups who want to grow through acquisition, and for the investors who fund these deals. It lays out a method, from the first filter to closing, for buying with discipline rather than enthusiasm.

The guiding idea fits in one sentence: a good acquisition is won before the signature, not after. The price, the financing structure and the real quality of the business are almost entirely set by the moment the ink dries. What follows is not a promise of a bargain, but a framework for avoiding the bad ones and recognizing the good ones when they come along.

Define your acquisition thesis before you search

The first mistake buyers make is to look at deals before they have written their thesis. An acquisition thesis is a short document that states, in black and white, what kind of business you are looking for and why you are the right owner for it. Without that compass, you will fall in love with the third target you see and bend your criteria to justify it. A clear thesis does the opposite: it gives you the right, and the strength, to say no quickly.

• The sector and model: revenue recurrence, seasonality, capital intensity, barriers to entry.
• The size: a range of revenue and EBITDA consistent with your means and your borrowing capacity.
• The geography: operational proximity, especially for a first acquisition where your presence will matter.
• The situation: a retiring owner handing over, a carve out from a group, or a turnaround, each calling for different skills.
• Your owner advantage: what you bring that is specific (network, sector expertise, financial discipline) and will make the business better in your hands.

An acquisition thesis is not there to find the rare gem. It is there to recognize, in a few minutes, the nine deals out of ten that are not for you.

Read the quality of a business, not just its price

The asking price of a business is the seller’s opinion. Its quality, on the other hand, shows up in a few structural traits that the numbers do not always reveal at first glance. Before you even discuss valuation, ask yourself whether the business is worth owning. A mediocre target bought cheaply is still a mediocre target.

• Customer concentration: if the top three customers represent more than half of revenue, the risk is concentrated and the value fragile.
• Owner dependence: if everything runs through the seller, their relationships and their head, you are not buying a business but a job that is hard to take over.
• Recurrence: contracts, subscriptions, natural repeat purchase. Revenue that comes back without sales effort is worth far more than revenue you must win again every year.
• Margin and its stability: a steady margin over several years beats an isolated recent peak.
• Quality of the accounts: clean financial statements, audited or at least kept rigorously, reduce both risk and the length of due diligence.

These criteria are not equal. Owner dependence and customer concentration are the two silent killers of SME and startup acquisitions: they do not show up in EBITDA but they destroy value in the eighteen months after the seller leaves. A clear eyed buyer hunts them down before talking money.

Valuation: from multiple to equity value

Most SMEs are valued on a multiple of EBITDA. The multiple depends on the sector, size, growth and risk, but it applies to a normalized figure: you must first adjust EBITDA for one off items, for excessive or insufficient owner pay, and for personal expenses run through the business. It is adjusted EBITDA, not reported EBITDA, that serves as the base.

Once you have the enterprise value (multiple times adjusted EBITDA), there is the step many buyers skip: moving from enterprise value to equity value. You subtract net financial debt, that is, borrowings less available cash, and adjust working capital against a normalized level. Two businesses with the same EBITDA can carry very different equity prices depending on their debt and their cash.

The multiple sets the enterprise value. It is net debt and working capital that set the check you actually sign.

Structure the financing and the leverage

An acquisition is rarely financed entirely in cash. The typical structure combines equity, a bank acquisition loan and, often, vendor financing where the seller agrees to be paid in part over time. Leverage amplifies the return on your equity, but it also amplifies the risk: every euro of debt is a euro of repayment that has to come out of the company’s cash, whatever happens.

The central question is not how much the bank will lend, but how much the business can repay without choking. Borrowing capacity is measured by free cash flow, after maintenance investment and tax, relative to the debt service. A target that spends more than two thirds of its cash on repayment has no room for a surprise, a lost customer or a lean year.

• Equity: your contribution, sometimes topped up by investors alongside you.
• Senior bank debt: the bulk of the leverage, usually amortized over five to seven years.
• Vendor financing: a signal of the seller’s confidence and a financing cushion, often subordinated to the bank debt.
• A cash reserve: never finance an acquisition to the last cent. Keep enough to weather the first months and absorb surprises.

Due diligence: confirm or renegotiate

Due diligence is not an end of process formality. It is the moment you check that the business you are buying is really the one the seller described. It has three aims: confirm the numbers, surface hidden risks, and gather the arguments for a possible renegotiation. Diligence done well rarely ends with an unchanged price.

• Financial: quality of adjusted EBITDA, reality of working capital, off balance sheet debt, pension commitments.
• Commercial: durability of the order book, key contracts and their change of control clauses, real customer satisfaction.
• Legal and tax: ongoing litigation, compliance, leases, intellectual property, employment liabilities.
• Operational and human: dependence on key people, condition of the assets, information systems, staff morale.

Protect yourself through the contract too. A well drafted representations and warranties clause covers you against liabilities that arose before the sale but surface afterwards. An earn out ties part of the price to future performance and aligns seller and buyer when the future is uncertain. These mechanisms do not replace good diligence. They extend its protection.

A worked example

Take a sound industrial SME with revenue of 5,000,000 euros and adjusted EBITDA of 800,000 euros. After discussion, you agree on a multiple of 5, an enterprise value of 4,000,000 euros. The business carries 500,000 euros of financial debt and holds 200,000 euros of cash, a net debt of 300,000 euros. The equity value, what you pay the shareholders, therefore comes to 4,000,000 euros minus 300,000 euros, which is 3,700,000 euros.

On the financing side, you put in 1,200,000 euros of equity, you secure 2,200,000 euros of bank debt amortized over six years, and the seller grants 300,000 euros of vendor financing over three years. The annual bank debt service runs around 430,000 euros in principal and interest. The business generates free cash flow of about 550,000 euros after tax and maintenance investment. Debt service coverage is therefore around 1.3 times: positive, but with little comfort.

At 1.3 times coverage, the deal holds as long as all goes well. The buyer’s real question is not "does it work?" but "what happens if EBITDA falls 15%?"

This is where the upfront work proves its worth. If you reduce dependence on the seller and secure the key contracts during diligence, a 15% drop in EBITDA stays absorbable. If you ignored those risks, the same drop pushes coverage below 1.1 and turns a good acquisition into a cash flow nightmare. The return on your 1,200,000 euros of equity depends far more on the strength of the target and the structure than on the multiple haggled over at the margin.

The first hundred days

The acquisition does not stop at closing: that is where it truly begins. The first months set the tone with the teams, the customers and the suppliers, all of whom are watching the new owner. The temptation to change everything fast is as dangerous as standing still. The right stance is to listen a great deal, secure the essentials, and touch only what you genuinely understand.

• Secure key people and customer relationships before any reorganization.
• Put cash flow steering in place without delay, because debt service does not forgive surprises.
• Organise an honest transition with the seller, with a timetable for handing over relationships and knowledge.
• Pick a small number of priority projects rather than reforming everything in the first year.

Buyer checklist

• Write an acquisition thesis before looking at a single deal.
• Filter every target on customer concentration and owner dependence before talking price.
• Calculate adjusted EBITDA and value only on that base.
• Move from enterprise value to equity value by adjusting net debt and working capital.
• Test borrowing capacity on free cash flow, not on the bank’s offer.
• Stress the plan: what happens to debt service coverage if EBITDA falls 15%?
• Run financial, commercial, legal and operational due diligence, and use it to renegotiate.
• Secure a representations and warranties clause and, if needed, an earn out.
• Keep a cash reserve: never finance to the last cent.
• Prepare a plan for the first hundred days, centered on people and cash.

Buy with method, not enthusiasm

Buying a business is a capital decision, not an infatuation. The frameworks set out here, the acquisition thesis, reading the quality of the target, moving from enterprise value to equity value and testing borrowing capacity, are enough to set aside the vast majority of bad deals and to approach the good ones with composure. The rest is a matter of discipline and honest numbers.

If you are studying a target, or want to build your thesis before you search, that is exactly Mercova’s territory. A diagnostic call lets you adjust EBITDA, size the equity value, test your financing structure and map the risks before you commit. Book a diagnostic call: we start from your real deal and tell you, with the numbers in hand, whether it is worth taking further.