We are considering acquiring a smaller firm in our industry. What financial homework comes first?

Start with earnings quality. The broker’s summary or the seller’s add-back schedule tells a story, but that story is told from the seller’s perspective. Your job is to understand what the business actually earns on a normalized basis. That means adjusting for owner compensation that doesn’t match market rates, removing one-time revenue or expenses, identifying related-party transactions that won’t continue, and questioning whether the margins you’re being shown will hold up under new ownership. A business earning $500,000 on paper might be earning $350,000 once you make honest adjustments.

Customer concentration and revenue durability come next. Revenue on a financial statement isn’t the same as revenue that will transfer to you. If 40% of the business comes from one customer, you need to understand that relationship deeply. Will that customer stay after the sale? Are contracts transferable, or do they require consent? How much revenue depends on personal relationships the current owner has built over years? The answers determine whether you’re buying a real business or a customer list that might not show up after closing.

Understand what transfers and what might walk. Key employees sometimes leave after an acquisition, especially if they were loyal to the owner rather than the company. Vendor relationships and favorable terms may not survive a change in ownership. Licenses, permits, and certifications may need to be reapplied for. Mapping these intangibles is part of the financial homework because they directly affect what the business will earn under your ownership.

Working capital deserves careful analysis. The purchase price is not the total cash you need. The business requires working capital to operate day to day, meaning cash tied up in receivables, inventory, and prepaid expenses, partially offset by payables and accrued liabilities. Many buyers are surprised when they close a deal and immediately need to inject additional capital because working capital was normalized differently than expected. Fractional CFO services help buyers model these requirements accurately before they commit.

Give thought to the combined entity structure early. How will the acquired business fit into your existing operations? Will it remain a separate entity or merge into yours? What systems need to integrate? These questions have financial, tax, and operational implications that are easier to address before closing than after. Getting the architecture right from the start avoids expensive restructuring later.

Kalea DeYoung has worked directly on acquisitions throughout her career as a CFO, evaluating targets, working through the financial diligence, and helping buyers understand what they’re actually buying. Kai Crest supports the financial evaluation while your deal counsel handles the legal side. This is the kind of decision support that comes with Advisory: CFO-Lite engagements. Senior financial perspective on a high-stakes decision without a full-time hire.

If you’re evaluating an acquisition and want a clear-eyed look at the financial homework ahead, schedule a consultation to discuss how Kai Crest can help.