What Makes a Good Acquisition Target? A Buyer's Checklist

The difference between a good deal and a bad one is usually visible before you sign anything. Here is what to look for, and what to walk away from.

Most acquisition mistakes are made before the deal closes. Not during the integration, not during the hold period, but at the point of selection. Buyers fall in love with a business, rationalise away the red flags, and find themselves two years into ownership wondering why the numbers never quite looked like the CIM.

The antidote is discipline. A clear, consistent set of criteria applied before enthusiasm takes hold. Not a rigid formula, because every business is different and context always matters, but a structured framework that forces honest answers to the questions that determine whether a business will reward its next owner or consume them.

This checklist is built around seven categories. A strong acquisition target does not need to score perfectly in every one. But it should be genuinely strong in most, and any weakness should be understood clearly before you commit.

1. Financial Quality

Does the business generate real, recurring cash flow?

EBITDA is the starting point, not the answer. The first question is whether the business converts its earnings into actual cash. High EBITDA with poor cash conversion, due to working capital demands, slow-paying customers, or heavy capital expenditure requirements, means the business will consume more cash than the headline number suggests. A lender will look at free cash flow, not EBITDA, when deciding how much to lend. You should too.

Is the revenue recurring or repeatable?

There is a meaningful difference between a business with long-term contracts, subscription revenue, or deeply embedded customer relationships and one where every pound of revenue has to be re-won each year. Neither is a disqualifier, but they carry different risk profiles and deserve different multiples. Understand what proportion of last year's revenue will automatically reappear next year without significant commercial effort.

Are the accounts clean and consistent?

Filed statutory accounts, management accounts, and the seller's own EBITDA bridge should reconcile without significant unexplained variances. If they do not, that is a problem in itself. In owner-managed businesses, management accounts are often informally prepared and inconsistently maintained. That is not unusual. What matters is whether a coherent picture of the business's true financial performance can be assembled from the available information.

How reliable are the normalisation adjustments?

Sellers and their advisers will present a normalised EBITDA that adds back owner-specific costs, one-off items, and non-recurring expenses. Treat these adjustments with scepticism until each one is verified. Common issues include: salary add-backs that assume a below-market replacement cost, one-off items that recur every year under a different label, and revenue recognised in a period where it was not genuinely earned. A business's true normalised EBITDA is often lower than the number in the teaser document.

Is there a clear trend in performance?

A business with three years of consistent, modest growth is more reassuring than one with a single exceptional year followed by decline. Understand the shape of the earnings history. If performance has been volatile, understand why. If there has been a recent step-up in profitability, be certain you understand what drove it and whether it is sustainable.

Checklist:

Free cash flow conversion above 80% of EBITDA
Proportion of recurring or repeatable revenue understood and quantified
Statutory and management accounts reconcile without unexplained gaps
Normalisation adjustments verified line by line
Three or more years of trading history available
No single year accounting for a disproportionate share of total earnings

2. Market and Competitive Position

Is the business operating in a stable or growing market?

You do not need a high-growth market, but you need one that is not in structural decline. A business with a 30% share of a market that is shrinking by 10% a year is not a good acquisition target regardless of how well managed it is. Understand the secular trends in the sector: regulatory direction, technology disruption, demographic shifts, and competitive dynamics at the market level, not just within the business.

Does the business have a defensible position?

The best acquisition targets have something that makes them genuinely difficult to displace: a proprietary process, a long-standing customer relationship, a geographic advantage, a regulatory licence, a specialised workforce, or simply decades of accumulated sector knowledge. Defensibility does not need to be dramatic. A business that has held 60% of its local market for 20 years because it does the work reliably and its customers see no reason to change is a strong acquisition target.

Who are the competitors, and what is the competitive dynamic?

Understand the competitive landscape properly. Who else serves these customers? How does the target differentiate? Is there a risk of a well-capitalised new entrant? Has the business lost any significant customers to competitors in the past three years, and if so, why? Competition is not a disqualifier, but naivety about it is.

Checklist:

Market neither in structural decline nor dependent on a single macro tailwind
Demonstrable competitive differentiation beyond price alone
Competitive landscape understood, including recent wins and losses
No near-term regulatory or technology risk that threatens the core model

3. Customer Quality and Concentration

How concentrated is the revenue?

Customer concentration is one of the most common and most underestimated risks in SME acquisitions. A business where one customer accounts for 30% or more of revenue is carrying a risk that needs to be very carefully evaluated. Even at 20%, the dependency is worth examining closely. The question is not just what percentage one customer represents, but what would happen to the business operationally and financially if that customer left tomorrow.

How long have the key customers been with the business?

Longevity is a positive signal. A business whose top five customers have all been clients for more than ten years is telling you something important about the stickiness of its product or service and the quality of its relationships. Recent customer wins are encouraging for growth but do not provide the same confidence about retention.

Are the key customer relationships personal to the founder?

This is the central question in many SME acquisitions, and it requires an honest answer. If the founder's personal relationship with a major customer is the primary reason that customer stays, the post-acquisition transition carries significant retention risk. The mitigation is not to avoid these situations entirely, but to have a credible plan for managing the transition and, ideally, to involve the founder in a structured handover process.

Is there a written contract in place, or is the relationship informal?

Many SME customer relationships are based on informal understanding, repeat orders, and long-standing goodwill rather than formal contracts. That is not inherently a problem, but it means the retention risk is harder to evaluate and harder to mitigate. Where significant revenue rests on informal arrangements, understand what drives the loyalty and what would be required to formalise it post-acquisition.

Checklist:

No single customer accounting for more than 20 to 25% of revenue without clear mitigation
Top customer relationships of three or more years' standing
Customer relationships understood in terms of personal vs. institutional loyalty
Formal or semi-formal arrangements in place for the largest accounts
Customer churn rate understood and within acceptable norms for the sector

4. Operational Resilience

Is the business dependent on the founder?

Key man risk is the operational equivalent of customer concentration. Many owner-managed businesses are deeply dependent on a single individual who holds the technical knowledge, the customer relationships, the supplier relationships, and the institutional memory of how the business actually runs. That individual leaving, even in a planned and managed way, creates genuine operational risk. Assess it honestly.

Is there a capable second tier of management?

The presence of a team that can run day-to-day operations without constant intervention from the owner is one of the strongest signals of a well-structured SME. It means the business has processes, not just a person. It also means the post-acquisition transition is more manageable: if the business can run without the founder for two weeks, it can probably run without them permanently with the right support in place.

Are the key operational processes documented?

In founder-led businesses, critical knowledge is frequently held in the founder's head rather than in any written process or system. Pricing decisions, supplier negotiations, quality standards, and customer escalation routes may all depend on informal judgment that has never been written down. This is not uncommon, but it is a risk that needs to be understood and addressed. A business with documented processes, even basic ones, is more transferable than one without.

What is the staff situation?

Understand the workforce: tenure, skill concentration, any recent departures, any pending employment issues, and the likelihood of retention through the ownership change. In skilled trades, professional services, or specialist manufacturing, losing key employees post-acquisition can be as damaging as losing a major customer.

What is the state of the physical and technology infrastructure?

Is the equipment up to date, or is there significant capital expenditure required in the near term? Are the IT systems functional, or is the business running on legacy infrastructure that will need replacing? Hidden capex requirements are a common source of post-acquisition surprise and can materially affect the return profile of a deal.

Checklist:

Key man risk assessed and transition plan considered
Second tier of management capable of running operations day-to-day
Core processes documented or documentable within a reasonable period
Staff tenure and concentration understood, key employees identified
No material deferred capital expenditure requirements hidden in the financials
IT and operational infrastructure fit for purpose or with known upgrade cost

5. Seller Motivation and Deal Dynamics

Why is the seller selling, and is the reason genuine?

This is one of the most important questions in any acquisition process, and the answer is not always what is offered first. Retirement is the most common stated reason, and frequently the genuine one, but it is worth probing. A business being sold because it has reached the ceiling of what the founder can manage, because a key contract is about to expire, or because a major competitor has entered the market tells a very different story. The best sellers are those who are selling because of a life stage change, not because the business has a problem they cannot solve.

Is the seller willing to stay involved during the transition?

A seller who is willing to remain available, whether formally as a consultant or informally as a reference point, for six to twelve months post-acquisition significantly reduces transition risk. Conversely, a seller who wants a clean break on day one of completion raises questions about the ease of the handover and, sometimes, about what they expect to be difficult once they have left.

Will the seller accept deferred consideration?

A seller who is willing to leave a portion of the purchase price as a loan note is signalling confidence in the business's continued performance. It does not eliminate risk, but it creates alignment: the seller wants the business to succeed after they have left, because their own financial outcome depends on it. Sellers who insist on a 100% cash exit and resist any deferred element deserve additional scrutiny.

Is the process competitive, and if so, how competitive?

Competitive processes drive up prices and reduce the time available for thorough diligence. They are not necessarily a reason to walk away, but they do require a clear discipline about what you are willing to pay and why. The most attractive acquisition opportunities are typically proprietary or lightly brokered, where the buyer has sufficient time and access to develop a proper understanding of the business before committing.

Checklist:

Seller's motivation understood and corroborated through the diligence process
Seller willing to provide a transition period post-completion
Seller open to deferred consideration in some form
Pricing discipline maintained regardless of process competitiveness
No material undisclosed reason for the sale surfaced during diligence

6. Growth and Improvement Potential

Is there identifiable operational upside?

The best ETA targets are businesses that have been well run by the founder's standards but have not been professionally managed. That distinction matters. A business where the founder made all the decisions, kept costs low by personal effort, and never invested in systems, pricing strategy, or sales infrastructure is a business with significant operational upside for an incoming operator. You do not need a revolutionary thesis. Basic professionalisation, improved pricing, a functioning CRM, and consistent management information can move the needle materially.

Are there revenue opportunities that have not been pursued?

Look for businesses where growth has been limited not by market conditions but by the founder's capacity or appetite. A founder who turned down contracts because they were too busy, did not pursue a geographic expansion they had planned, or never invested in digital marketing is leaving identifiable upside on the table. These are the businesses where modest investment and attention can generate real returns.

Is there a credible organic growth story?

You do not need a hockey-stick growth plan. But there should be a coherent narrative about why the business will be at least as profitable in five years as it is today, and ideally more so. That narrative should be grounded in customer dynamics, market conditions, and the specific operational improvements you plan to make, not in generic assumptions about sector tailwinds.

Does the sector support add-on acquisitions?

If your ambition extends beyond the initial platform, assess whether the sector is fragmented enough to support an add-on strategy. A highly fragmented sector with many small operators serving the same customer base is a strong signal. A sector with three dominant players and limited smaller operators is not the right environment for a consolidation thesis.

Checklist:

Identifiable operational improvements that do not require a step-change in revenue
Evidence of growth opportunities not pursued due to founder capacity rather than market limits
Coherent five-year earnings case built on reasonable, verifiable assumptions
Sector fragmentation assessed if an add-on strategy is part of the plan

7. Deal Structure and Fundability

Can the deal be financed on reasonable terms?

A business that cannot attract senior debt financing on acceptable terms is telling you something. Lenders who know the sector well will apply haircuts to EBITDA, require minimum coverage ratios, and form their own views on the sustainability of the earnings. If the debt market is uncomfortable with a business, it is worth understanding why before proceeding on the assumption that your equity investors will fill the gap.

Is the price fair relative to the earnings quality?

Entry multiple matters enormously to the final return. Paying six times EBITDA for a business that will grow steadily and exit at six times produces a return driven entirely by earnings growth and debt paydown. Paying four times the same business produces a substantially better return. Discipline on entry price is one of the most reliable levers an ETA buyer controls, and it is the one most often abandoned under deal pressure.

Is the equity gap manageable?

Most deals will have some gap between what the bank will lend, what the seller will defer, and what the lead equity group will commit. That gap needs to be closed before the transaction can complete. Assess the size of any potential gap early, understand where it is most likely to come from, and have a plan for sourcing that capital before you are two weeks from completion and running out of time.

Is the legal and corporate structure clean?

Complex shareholding structures, outstanding litigation, pending regulatory issues, or corporate history involving dissolved entities or connected-party transactions all add friction and cost to the acquisition process. They are not necessarily disqualifying, but they need to be understood and priced into the deal. A clean corporate structure with straightforward ownership history is a meaningful advantage.

Checklist:

Senior debt available on terms consistent with the deal economics
Entry multiple supported by earnings quality and exit multiple assumptions
Equity gap identified and a credible funding plan in place
Corporate structure clean, with no material outstanding legal or regulatory issues
Legal due diligence costs and timeline within the scope of the deal size

Putting It Together

No business will tick every box. The point of a checklist is not to find a perfect target, it is to ensure that every significant weakness is identified, understood, and consciously accepted before you proceed, rather than discovered after you have committed.

The businesses that make the best ETA targets share a common profile. They are profitable, with genuine cash flow. They have a defensible position in a stable market. Their customers are loyal and their relationships are transferable. Their operations are functional and not entirely dependent on the founder. And they have a seller whose motivations are aligned with a clean, professional transition.

Those businesses exist in meaningful numbers in the UK and Western European market. Finding them is the hard part. Evaluating them rigorously, once found, is what separates the buyers who build something lasting from those who spend their first two years managing problems they should have anticipated.

How Archimax Supports Deal Evaluation

Archimax is an information and deal-discovery platform for the ETA and search fund community across the UK and Western Europe. It supports deal discovery and presentation across the six ETA model types.

When a searcher registers a deal, the platform captures its key characteristics, including financial profile, market position, customer dynamics, operational profile, and deal structure, using categories of the kind set out in this article. This helps searchers present a deal in a clear, structured form and helps the platform organise deals consistently. Further information about the platform is available at archimax.io.

Alexander Kalis is the Founder and CEO of Archimax Global Solutions (archimax.solutions). Archimax is an information and deal-discovery platform for the entrepreneurship-through-acquisition and search fund community, at archimax.io.