Buying A Small Business

Preface: this is coming as a full-time, true small business (SBA) lender and having been CFO for several true small businesses (revenues <$20MM). 

With that preface, and assuming that you are not talking about buying a business dependent on RE... digging heavily into cash flow statements and balance sheets for true small business is an almost futile exercise. Given the purchase price you are talking about, this is likely the same size of businesses I see every day and managed as a CFO. Given that, the true nature of revenues and cash flow are WHOLLY different than they are in a large RE portfolio or at a middle-market or public corporation. Just like at a big company, timing and regularity of revenues are everything but they are NOT as stable, regular, timely, or predictable as they are at scale. Even minor hiccups can have major impacts that last a long-time so things are just *different*. I don't think its controversial to say that big companies can make their financials say whatever they want because GAAP is a very 'flexible' tool; but small companies can make their statements say whatever they want, too, because GAAP may as well be Mandarin. Are revenues and expenses recognized in a coherent manner (much less consistently) is a real question. 

Your analysis of the company and valuation should depend less on the real financials and more on the qualitative assessments such as receivable agings over time (look for consistent customers, timeliness of payments, and concentrations... along with the potential for poor financial reporting/controls), customer relationships (lots of ways to assess this), and operational sophistication. 

If you want to look at ways to improve a business - start with finding out how things have been managed. Often times it is "thats how its always been" and processes are decoupled from economic realities. Or there is no way to improve them because you just can't or have not yet achieved scale. No matter how many business books or MBAs you have; there is no way for a back office made up of 3 people to automate or go lean or do whatever the hell some consultant to a large company would say. 

Biggest things I would advise are finding out why the business is for sale, why it is the size that it is (market limitation? barriers to expansion? competence/interest of owner?) and to what extent the business is the current owner. 

Once you find one that makes sense; all the considerations about asset purchase vs equity purchase, etc etc will just fall into place. I can't emphasize enough how true Buffett's advice about "great business at a good price" is in the small business world. Don't get hung up on all the fancy techno-stuff we know as finance people related to taxes this, depreciation that, or compliance worries. Every true small business in America is comically non-compliant with every kind of rule you can imagine. If you're serious about being a small-business owner - keep it simple and stay hyper-focused each and every day on what's important. If you ask yourself that question and act accordingly you'll be OK. Do not underestimate how much success (being defined as not failing and carving out your own little comfortable lifestyle) in small business is really just being the tallest short-person (meaning you just have to not suck and not be stupid). If you can achieve that and then work on leveling-up, you can grow and scale and get in magazines.