When you’re looking at 20-30 businesses to make 2-3 solid offers, you might not have the time to spend hours analyzing every single one.
You need a quick screening process to separate potential winners from obvious passes.
Today, I’ll show you my framework for evaluating deals in under 5 minutes.
The Golden Ratio test (30 seconds)
Look for profit margins between 15% and 35%.
If they’re below 15%, you’re at risk if a major change happens like losing a big customer.
Now, you might think a 35% profit margin sounds great. So why do I recommend avoiding anything above that?
Usually, that means the owner is doing most of the work themselves, which means you’re buying yourself a job.
This one metric eliminates most bad deals almost immediately.
The Three Pillars check (2 minutes)
Every business I buy must have:
Recession resistance: People need this service regardless of the economy (HVAC, plumbing, accounting, waste management)
Recurring revenue: Customers pay at least twice per year, ideally monthly or quarterly
Barrier to entry: Hard for competitors to replicate (requires licenses, capital, or established relationships)
If a business fails any of these three tests, it’s probably best to move on.
The valuation reality check (1 minute)
Small businesses typically sell for 2-4x cash flow.
Owner-dependent businesses (where the owner works in it daily) gets you a 2x multiple…
Whereas management-run businesses (where the owner is hands-off) can sell for a 4x multiple.
If the asking price is over 4x cash flow, the owner is probably overvaluing their business or wasting your time.
Quick red flags (1 minute)
Watch out if you see:
- Declining revenue over the last 3 years
- Any single customer represents over 10% of revenue
- Business is under 5 years old
- Personal expenses mixed with business expenses
- Owner won’t provide complete financials
Any one of these should make you pause, and if there are multiple red flags, walk away.
The 5-minute decision
After this quick screen, you should know:
- Pass completely (most deals fall here)
- Pass for now, but circle back later
- Worth a deeper look (maybe 1 in 10 deals)
Only the “worth a deeper look” businesses should get the full due diligence treatment.
This will save you hundreds of hours analyzing businesses that never had a chance.
Speed matters
The faster you can screen deals, the more you can evaluate, and the more you evaluate, the better your odds of finding a winner.
Use this framework to build your deal flow muscle and find great opportunities faster.
Need more deals to screen?
I share business opportunities with subscribers when I come across ones worth evaluating.
To get those emails, fill out this short form:
👉 I want to buy (or invest as a silent partner into) a small business
Or if you’re looking to sell your business:
👉 I want to sell my small business (and I’m actively looking for buyers)
Onward,
— Ben Kelly
