When Revenue, Equipment, and Sales Are Deceiving
One might have predictable earnings, experienced management, recurring customers, and documented systems. The other might depend heavily on its owner, struggle with cost controls, or require additional capital to maintain operations...
Acquiring a business without due diligence can increase risk, create unnecessary exposure, and compromise business ownership. Recently, I had a conversation with a business owner about an acquisition that didn’t unfold as expected. Like many entrepreneurs, the owner had spent years developing industry knowledge, building relationships, and growing a business. Acquiring another company, a parallel and complementary company, seemed like a logical next step. The missing key: the owner failed to secure the services of a business broker to conduct due diligence and identify blind spots.
The new opportunity offered established employees, customers, systems, and a social footprint. There was just one problem. Buying revenue isn’t the same as buying a profitable, sustainable, and repeatable business model.
When entrepreneurs evaluate acquisitions, revenue is often one of the first numbers discussed.
- How much does the business generate annually?
- What customers and contracts are in place?
- How much additional market share could the acquisition provide?
These are important questions, but revenue alone doesn’t determine whether an acquisition creates value.
Two businesses generating identical revenue can have dramatically different valuations. One might have predictable earnings, experienced management, recurring customers, and documented systems. The other might depend heavily on its owner, struggle with cost controls, or require additional capital to maintain operations. An acquisition should be evaluated on its ability to produce sustainable economic value—not simply increase sales. The world of acquisitions is famous for acquiring another company or another feature to augment the acquiring company’s product portfolio and then winding it down or selling it for a loss.
It’s not enough to assume the new feature will work with your existing service or product line—the key is leverage. Overleverage your primary business’s operating capital, and you increase risk.
When One Business Begins Supporting Another
A dangerous situation can develop when an established business begins subsidizing an underperforming acquisition. In my previous company, I made that mistake once. I subsidized failing performance on another project. As the saying goes, “Robbing Peter to pay Paul.” Initially, the additional financial support may seem temporary. Perhaps the acquired company needs working capital, customers are slow to pay, or integration expenses exceed expectations. The owner transfers money to keep things moving. Then another transfer follows. Before long, the original business is financing the acquired company’s losses. Instead of creating additional capacity, the acquisition begins consuming the resources that made expansion possible.
This is why owners need to understand whether each operation can support its own costs, debt obligations, and working capital requirements. Without that visibility, an underperforming acquisition can threaten an otherwise viable business, and the dominoes could fall.
The Hidden Risk of Acquisition Financing
Financing can make business ownership possible, but it can also introduce risks beyond the acquired company. Depending on the transaction, lenders may require collateral, personal guarantees, or security interests in other assets. An investment intended to create financial independence can suddenly place existing business or personal assets at risk. Before acquiring a company, owners should understand the obligations they’re accepting. What assets secure the debt? What happens if revenue falls below projections? How much working capital remains after closing?
And perhaps most importantly:
- What happens if the acquisition doesn’t perform as expected?
- What happens if the acquired company’s existing service or product lines are not as profitable as expected?
- What happens if the lender calls the entire loan, SBA-backed or not?
These ownership questions are much easier to address before a transaction closes than after financial difficulties emerge.
Entrepreneurs are accustomed to solving problems. Paraphrasing entrepreneur and The Momentum Podcast host Alex Charfen, entrepreneurs envision the future and then come back to the present to make it a reality. Persistence is an essential part of entrepreneurship. But in any acquisition, due diligence is a must.
Knowing When to Change Course
When sales decline, they find customers. When expenses increase, they look for efficiencies. When employees leave, they recruit replacements. But persistence and financial discipline aren’t always the same thing. Sometimes the appropriate decision is to restructure obligations, negotiate with creditors, sell assets, pursue a business sale, or wind down an operation. There is no universal answer. When significant debt, guarantees, or potential insolvency are involved, qualified legal and financial guidance becomes especially important.
The objective isn’t to defend yesterday’s decision at any cost. It’s to preserve as many viable options as possible for tomorrow.
Ownership Should Create Options
I’ve spent considerable time thinking about the difference between operating a business and owning an enterprise. A business can generate substantial revenue while leaving its owner financially exposed. It can employ dozens of people while remaining dependent on one person’s daily involvement. And it can appear successful from the outside while providing very little financial freedom. True enterprise value extends beyond revenue. It reflects sustainable earnings, management capabilities, customer relationships, transferable operations, and the risks a future buyer would inherit. These factors matter whether an owner intends to sell, transfer the company to family, retain ownership while delegating management, or continue operating for another decade.
The purpose of building an enterprise isn’t necessarily to sell it. It’s to build something valuable enough that selling, retaining, or transferring ownership becomes a choice.
That choice is what creates freedom. Freedom is what every business owner should be after.