Here’s a painful truth about buying businesses:
You need to look at 20-30 businesses to make 2-3 solid offers.
That’s a lot of time spent reviewing financials, analyzing operations, and talking to sellers.
Most first-time buyers waste months digging deep into businesses that never had a chance of being good deals.
Today, I’m sharing the exact framework I use to screen businesses in 30 minutes or less, to avoid wasting any time on full due diligence.
Start with the golden ratio test
First, you only want to look at businesses running 15-35% profit margins.
Below 15%?
Too risky. If a major customer leaves or costs increase slightly, you’re in big trouble.
Above 35%?
The owner is probably doing all the work themselves, and instead of buying a business, you’re buying yourself a job.
This single metric eliminates about 60% of bad deals immediately.
Check for immediate red flags
Next, scan for these dealbreakers:
- Revenue declining over the last 3 years (you want consistent growth, not a sinking ship)
- Any single customer makes up more than 10% of revenue (massive risk if they leave)
- Personal expenses mixed into business financials (makes real profitability impossible to determine)
- Business is under 5 years old (over 90% failure rate)
- Asking price is over 4x cash flow (seller is overvaluing or wasting your time)
If you spot any of these, move on immediately.
Apply the quick valuation formula
Take the average cash flow from the last 3 years and multiply by 2-4x.
For an owner-dependent business, where they work 40+ hours/week, use 2-2.5x.
And for a management-run business, where the owner works 5-15 hours/week with a GM in place, use 3-4x.
If the asking price is way above your calculation, it’s probably not worth pursuing.
Verify the three key criteria
Does this business have:
- Recurring revenue (customers pay multiple times per year, not one-time purchases)?
- Recession resistance (essential service people need regardless of the economy)?
- Barrier to entry (hard for competitors to start due to licenses, capital, or location)?
If it’s missing more than one of these, keep looking!
Stop wasting time on bad deals
This 30-minute screening process won’t tell you everything about a business…
But it will tell you whether it’s worth spending the next 30-60 days on due diligence.
Most buyers skip this step and waste months chasing bad deals.
Follow these steps I’ve outlined today, and save yourself the trouble.
Now it’s time to put this into practice.
I share vetted business opportunities with subscribers when I find deals worth evaluating.
If you’d like to get those communications, fill out this form:
👉 I want to buy (or passively invest into) a small business
Or if you're ready to sell your business, share the details below:
👉 I want to sell my small business
Onward,
— Ben Kelly
