The #1 mistake buyers make? Falling in love with potential instead of profits.
This isn't about the due diligence process (we covered that comprehensive playbook here). This is about the 10 predictors that determine whether a business is worth your time in the first place.
This checklist separates wealth-building businesses from money pits. Each criterion comes with specific documents to request and calculations to run. No guesswork, no emotion—just data-driven decision making.
If a business passes 7-8 of these 10 predictors, it's worth deeper diligence. Less than that? Keep looking.
✅ The 10 Predictors of Long-Term Success
1. Recurring Revenue: The 75% Retention Rule
Stable businesses keep 75%+ of customers year-over-year. Anything less means you're buying a treadmill, not an asset.
How to Verify:
Request customer lists for past 3 years
Calculate exact churn rate: (Lost Customers ÷ Starting Customers) × 100
Demand monthly revenue by customer for 24 months
Quick Action: If churn exceeds 25%, walk away or renegotiate price down 30%.
2. Customer Concentration: The 20% Maximum
No single customer should exceed 20% of revenue. Period. Concentration creates fragility.
How to Verify:
Request accounts receivable aging report
Match against P&L revenue figures
Review top 10 customers for past 2 years
Quick Action: Calculate concentration risk: if top 3 customers = >40% of revenue, demand seller indemnification.
3. Owner Independence: Systems Over Heroes
If the business needs the owner's relationships or daily presence, you're buying a job, not an investment.
How to Verify:
Request Standard Operating Procedures manual
Review key employee retention agreements
Ask: "What breaks if you disappear for 3 months?"
Quick Action: No SOPs? Reduce offer by cost of creating them (typically $25-50k).
4. The 15% EBITDA Floor
Businesses with EBITDA margins below 15% have no room for error. Target 20%+ for breathing room.
How to Verify:
Calculate from tax returns: (Net Income + Interest + Taxes + D&A) ÷ Revenue
Cross-check against monthly P&Ls
Verify add-backs are legitimate (not fantasy)
Quick Action: EBITDA = (Revenue × 0.15) minimum. If it's less, move on.
5. Capital Efficiency: The Cash Conversion Test
Great businesses turn profits into cash, not equipment purchases. Beware the CapEx monster.
How to Verify:
Request 5-year CapEx history and depreciation schedules
Calculate Cash Conversion Cycle: DSO + DIO - DPO
Measure working capital as % of revenue (target <15%)
Quick Action: If CapEx consistently exceeds 10% of revenue, the business eats cash. Price accordingly.
6. Competitive Moat: Barriers That Matter
"Competition is for losers." Look for businesses with genuine protection.
How to Verify:
Request all customer contracts (focus on termination clauses)
Review licenses, certifications, and regulatory requirements
Identify switching costs for customers
Quick Action: No contracts longer than 12 months? No regulatory barriers? Discount valuation by 25%.
7. Market Tailwinds: The 2x GDP Test
Target sectors growing minimum 4-6% annually (2x GDP). Declining markets kill even great operators.
How to Verify:
Pull industry reports from IBISWorld or similar
Check trade association growth data
Review customer industry health
Quick Action: Google "[industry name] market size forecast" – if declining or flat, pass.
8. Essential Demand: Mission-Critical Services
The best businesses solve problems customers must solve—compliance, safety, or operational necessity.
How to Verify:
Ask customers: "What happens if this service stops?"
Review contracts for penalty clauses
Check regulatory requirements driving demand
Quick Action: If customers can easily postpone or eliminate the service, it's a vitamin, not a painkiller. Pass.
9. Clean Financials: The Quality of Earnings Reality Check
Messy books hide messy businesses. Demand clarity or walk.
How to Verify:
Require 3 years of tax returns (not just P&Ls)
Commission a Quality of Earnings report for deals >$2M
Scrutinize every add-back (90% are BS)
Quick Action: Add-backs exceed 30% of stated EBITDA? Red flag. Reduce offer by 50% of questionable add-backs.
10. Debt Service Coverage: The 1.5x Rule
After paying the bank, you need cash to operate and grow. DSCR below 1.5x means you're cash-strapped from day one.
How to Verify:
Calculate: (EBITDA - CapEx - Taxes) ÷ Annual Debt Service
Model with YOUR financing terms, not theoretical ones
Stress-test with 20% revenue decline
Quick Action: DSCR below 1.5x? Reduce leverage or reduce price. No exceptions.
💎 Bonus: The Qualitative Factors
Seller Motivation: External Pressure Beats "Exploring Options"
Real reasons create real deals. Retirement, health issues, partnership disputes—these drive realistic pricing. "Just seeing what's out there" wastes time.
Red Flag: Seller won't commit to timeline or keeps moving goalposts.
Operational Simplicity: The One-Sentence Test
Complex businesses have more breaking points—more suppliers, more processes, more things to manage, more places to bleed cash. Simple businesses do one thing exceptionally well and can scale without adding complexity.
Green Flag: "We do X for Y customers" (We provide commercial HVAC maintenance for office buildings) Red Flag: Multiple revenue streams, talk of "synergies," or needing a whiteboard to explain the model
If you can't explain it simply, it’s much harder to scale it profitably.
Your Disciplined Approach to Wealth Building
Finding all 10 predictors is like finding a unicorn—theoretically possible, practically unlikely. But hitting 7-8 creates a solid foundation for long-term wealth.
Your next steps:
Screen aggressively: Disqualify deals missing 4+ predictors immediately
Verify religiously: Never trust, always verify with documents
Calculate coldly: Numbers don't lie, sellers do
Think decades: Will this business thrive in 10 years?
Remember: The best acquisitions are boring businesses with predictable cash flows and genuine competitive advantages. You make money when you buy, not when you sell.
Discipline beats excitement. Boring beats sexy. Cash flow beats potential.
Use this checklist on every deal. The businesses that pass may not impress at cocktail parties, but they'll fund your retirement and compound wealth for decades.
Disclaimer: This guide is for educational purposes only and does not constitute legal, financial, tax, or investment advice. Business acquisitions involve significant risks, and outcomes can vary widely based on individual circumstances. Always consult with qualified professionals including attorneys, CPAs, and financial advisors before making acquisition decisions. The EBIT Community does not guarantee the accuracy of information provided or the success of any acquisition strategy. Past performance and examples do not guarantee future results.
