Deal Evaluation and Structuring: Valuation, Diligence and Terms

Evaluating a deal means deciding what a business is worth, whether its earnings are real and what terms make the purchase work. Our view is that a deal should still cover its debt after you pay a manager, at a price near the market, and that structure matters as much as price.

This guide gathers the articles on each stage. It starts with valuation: seller's discretionary earnings, EBITDA, add-backs and what an asking price includes. It then covers due diligence, including how to verify a seller's numbers, when a quality of earnings report is needed and how to test whether a business can run without its owner, followed by red flags and when to renegotiate or walk away.

The later sections cover letters of intent and the terms that get negotiated: asset versus stock purchases, working capital pegs, leases, purchase price allocation and non-competes, plus the closing process. These articles are general information. Your lawyer, accountant and lender should confirm how each point applies to your deal.

Valuation

• How are small businesses valued? | Meraki Dealmakers
  Most small businesses sell at a multiple of seller's discretionary earnings: 2.57x on average in BizBuySell data, 2.7x in Q1 2026, as of October 2026.
• What is the difference between SDE and EBITDA?
  SDE adds back one owner's salary and benefits; EBITDA treats the owner's pay as a cost. Above roughly $1M of earnings, buyers switch to EBITDA (October 2026).
• Which add-backs are legitimate, and which should you question?
  Legitimate add-backs: one owner's pay, interest, depreciation, documented one-offs. At 2.57x SDE, each $10,000 of false add-backs adds $25,700 to the price.
• Does the asking price include inventory, receivables and working capital?
  Usually not all three. Main Street prices often exclude cash and receivables, and SBA rules put working capital in the 10% injection base (October 2026).
• How much should I pay to buy a small business?
  Pay a small business no more than the lowest of market value, the appraisal and what cash flow can carry. SDE multiples run about 2x to 4.5x by revenue band.
• How do you tell a good deal from a bad deal?
  A good deal still covers its debt 1.25x after you pay a manager's salary, at a price near the industry multiple (BizBuySell 2021-Q1 2026 average: 2.57x SDE).
• How do you value a business with unreported cash income?
  Value it as if the cash doesn't exist. Lenders won't count it, so at a 2.57x multiple each $100K of claimed cash adds about $257K you pay from your own cash.

Deal math under SBA rules

• My deal cleared 1.15x DSCR. What happens now that the SBA requires 1.25x?
  A 1.15x deal now fails. As of October 2026 SBA SOP 50 10 8.1 needs 1.25x on historical cash flow, 8.7% more; in our $1.5M example the price must drop $86,577.
• How do I calculate DSCR on a business I want to buy (using tax returns, not the broker's SDE)?
  Divide tax-return cash flow after a replacement salary by yearly debt payments. As of October 2026 SBA SOP 50 10 8.1 needs 1.25x; a $1.45M loan needs $287,428.
• The asking price was set under the old SBA rules. How do I use the 1.25x rule to negotiate price?
  Divide cash flow by 1.25, then 0.15858, then 0.9. As of October 2026 under SBA SOP 50 10 8.1, $300,000 of cash flow supports about a $1.58M price, not $1.73M.

Due diligence

• What questions should you ask when buying a business?
  Ask in three stages: about 10 screening questions before the LOI, proof questions in the 30-60 day diligence window, then transition questions before closing.
• What is on a due diligence checklist for buying a small business?
  Run diligence in four phases, cheapest deal-killers first. SBA deals typically allow 30 to 60 days, and total deal costs run about 2% of the purchase price.
• How do you verify that a seller's numbers are real?
  Tie three sources: tax returns, bank deposits and POS data. Reconcile the 1 to 2 years an SBA lender uses, then test every add-back against documents.
• Do you need a quality of earnings report to buy a small business?
  Required for SBA buys of $3M+ as of Oct 2026. Below that it is optional: QoE-lite reviews cost under $10K, and SBA-deal QoE quotes run from $7.5K to $30K+.
• Who pays for the SBA-required quality of earnings, and what does it cost on a $3M+ deal?
  The lender orders it and the borrower bears the cost, per secondary reports. As of October 2026 QoE quotes run about $7,500 to $50,000 on $3M+ SBA deals.
• How do you know whether a business can run without its owner?
  Run five tests: time map, relationships, licenses, know-how and an absence check. Price in every role you must hire; SBA lets the seller stay up to 24 months.
• How much customer concentration is too much?
  No official cutoff exists. Test it: if losing your top customer drops SBA debt coverage below 1.25x, concentration is too high for that price and structure.
• Who should be on your deal team, and when do you hire them?
  Your deal team is a lender, an M&A lawyer, a CPA and a QoE provider. Line up the lender and CPA before you search; legal fees ran a $28.5K median in one survey.

Red flags and renegotiation

• What are the red flags when buying a business?
  Sort red flags into walk, reprice or restructure. Earnings you cannot document count for nothing with an SBA lender, who tests 1.25x coverage on history.
• What do you do when a seller won't share financials?
  Before an LOI, partial financials are normal. After it, walk if tax returns and bank statements don't arrive within 2 weeks. SBA lenders need the history.
• Why won't the broker share financials before an LOI?
  To protect confidentiality. Expect summary P&L and recast SDE after an NDA; records come in 30-60 days of diligence. No yearly numbers at all is a red flag.
• Should you buy a business with declining revenue?
  Only if the cause is fixable and you price on trailing earnings. SBA lenders use the last 1 or 2 fiscal years, not projections, so today's cash must cover debt.
• When should you renegotiate and when should you walk away?
  Walk on dishonesty or risk you can't measure. Cut price for lower earnings, change terms for uncertain risk, hold back for known liabilities. SBA bans earnouts.

Letters of intent and negotiation

• Should you offer the asking price in your letter of intent?
  Only if the multiple fits the market (2.57x SDE average), the earnings are documented and coverage clears 1.25x. Never bid high planning to cut later.
• What should a letter of intent to buy a business include?
  Include price and its earnings basis, structure, payment terms, 30-60 days of diligence, 30-90 days of exclusivity, plus SBA financing and valuation conditions.
• Is a letter of intent binding? | Meraki Dealmakers
  Usually only in part. Price and terms are non-binding; exclusivity (typically 30-90 days), confidentiality and expenses are binding. Have a lawyer check yours.
• What happens after you sign a letter of intent?
  SBA deals typically take 60 to 120 days from LOI to close: 30 to 60 days of diligence, a valuation and loan approval, the purchase agreement, then closing.
• How do you compete when other buyers want the same business?
  Compete on certainty and cash at close before price. Sellers got 83-92% of value in cash at close, and 61% of buyers ask for seller financing, so ask for less.

Deal terms: structure, working capital and legal

• Asset purchase or stock purchase: which should a buyer choose?
  Most small-business buyers choose an asset purchase: fewer inherited liabilities and goodwill deductible over 15 years. SBA partial buyouts require stock.
• Are inventory and receivables included when you buy a business?
  On most Main Street deals inventory is included or added at cost, while cash and receivables stay with the seller. Larger EBITDA deals include working capital.
• What is a working capital peg? | Meraki Dealmakers
  A working capital peg is the normal level of receivables plus inventory minus payables a seller must deliver at closing; the price moves dollar for dollar.
• What happens to the lease when you buy a business?
  In an asset purchase the lease must be assigned with landlord consent. Lenders want it to run as long as the loan, up to 10 years on an SBA acquisition loan.
• What is purchase price allocation (Form 8594), and why does it matter?
  Purchase price allocation splits an asset deal's price across equipment, intangibles and goodwill on IRS Form 8594. Buyers amortize goodwill over 15 years.
• What should the seller's non-compete say?
  A seller's non-compete should name who is bound, the activities, territory and duration, plus no-solicit terms. Price allocated to it amortizes over 15 years.
• What kind of entity should you buy a business through?
  Most buyers form a new LLC to buy the business. If you plan to buy more than one, have a holding company own that LLC from day one; SBA counts affiliates.
• What do lawyers and accountants cost when you buy a business?
  In a buyer survey, legal fees ran $10K-$80K (median $28.5K), a QoE cost a median $40K, and total deal costs were about 2% of price on a median $4M deal.

Timeline and closing

• How long does it take to buy a business?
  Most of the time is the search: search funds took about 20 months in the 2026 Stanford study. After the LOI, an SBA deal typically closes in 60 to 120 days.
• What has to be done before closing day? | Meraki Dealmakers
  Before closing: meet lender conditions, season or document your 10% injection, finalize purchase documents, set up accounts and sign a closing statement.

More guides

• Financing an Acquisition
• Roll-Ups and Holding Companies
• Public Stock for Acquisitions
• All articles

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This guide is general information, not legal, tax or investment advice.