The First Metrics I Study When Looking at a Potential Acquisition

When I first started reviewing acquisition opportunities, I got overwhelmed by the sheer number of metrics people suggested tracking. There were ratios, formulas, and benchmarks for everything from return on equity to obscure financial modeling. I felt like I needed to be an investment banker just to know whether a deal was worth considering.

Over time, I realized most of that noise wasn’t necessary, at least not in the early stages. When I evaluate a business today, I start with a small set of core metrics. These numbers give me a quick but reliable picture of whether the deal is worth pursuing deeper. They don’t tell me everything, but they tell me enough to know if I should invest time and resources into due diligence.

In this article, I’ll walk through the first metrics I study, why they matter, and how I use them to separate real opportunities from time-wasters.

Why Early Metrics Matter

At the beginning of the acquisition process, I don’t want to drown in detail. I want clarity. The first metrics I study help me:

• Gauge the financial health of the business.
• Spot obvious red flags.
• Understand the scale of opportunity.
• Decide whether deeper diligence is worth it.

Without these metrics, I risk wasting weeks chasing deals that were never viable in the first place.

Metric 1: Seller’s Discretionary Earnings (SDE) or EBITDA

The first thing I look at is cash flow which the business actually produces for its owner. For smaller businesses, that’s often SDE (seller’s discretionary earnings). For larger ones, it’s EBITDA (earnings before interest, taxes, depreciation, and amortization).

This metric tells me the true earning power of the business. I want to know what’s left after normalizing for one-time expenses, personal perks, or inflated salaries. Without this number, valuation conversations are meaningless.

Metric 2: Revenue Trends

I look at revenue over the past three to five years. Is it growing, flat, or declining? A flat or slightly declining trend doesn’t always kill a deal, but it changes how I approach valuation. A business with steady growth is far more attractive.

I don’t just look at the numbers I look for seasonality and volatility. Consistent, predictable revenue is a positive sign. Volatile revenue signals risk.

Metric 3: Customer Concentration

I always check how much revenue comes from the top one or two customers. If one client represents 40% or more of revenue, I tread carefully. That concentration creates fragility. Diversification, on the other hand, creates stability.

Metric 4: Gross Margins

I want to know if the company is competing on price or delivering real value. Strong margins suggest pricing power and differentiation. Weak margins suggest commoditization.

Margins also tell me how much room I’ll have to cover financing costs and still make a profit.

Metric 5: Employee Dependency

While not a pure financial metric, I always ask: How dependent is this business on specific employees or the owner themselves? If the answer is “very,” that’s a red flag. Metrics like average employee tenure and turnover rate give me a sense of stability.

Metric 6: Working Capital Needs

I check how much capital the business requires just to operate. If receivables take too long to collect or inventory ties up cash, I know the deal will need more liquidity than the headline numbers suggest.

Metric 7: Debt Load

I look at any existing debt obligations. Some businesses operate fine under leverage, but too much debt relative to earnings makes me cautious.

Why These Metrics Come First

I focus on these metrics because they reveal the essentials:

• Is the business profitable?
• Is revenue stable?
• Is the customer base secure?
• Are operations sustainable?

If the answers are positive, I move forward. If not, I step back before wasting more time.

Mistakes I’ve Made

Early in my career, I ignored these basics and jumped straight into complex projections. I modeled growth scenarios, marketing plans, and expansion opportunities before asking whether the business had stable cash flow or manageable customer risk.

That approach led me into deals where the “upside” blinded me to the fragility of the core business. I’ve since learned that the basics matter more than the bells and whistles.

How I Use These Metrics in Practice

When I get a teaser or CIM (confidential information memorandum), I run these metrics quickly. Within hours, I know if the business is worth pursuing further.

If the numbers check out, I move into deeper diligence, examining contracts, culture, legal exposure, and growth levers. If they don’t, I move on.

Final Thoughts

The first metrics I study when evaluating a business aren’t fancy. They’re straightforward indicators of cash flow, stability, and risk. They may seem simple, but they’re the foundation of every good acquisition.

I’ve learned that if these basics aren’t solid, no amount of strategy will save the deal. But if they are, everything else becomes easier.

That’s why I always start with these metrics and why they continue to guide me through every acquisition I consider.

I share more about my acquisition frameworks, private equity strategies, and real estate ventures at DrConnorRobertson.com, where I document the playbook I’ve built deal by deal.