I recently walked away from a small business acquisition.

It wasn’t because I dislike the industry. It wasn’t because the owner seemed unkind. It was because the numbers didn’t give me enough truth to make a decision — and in investing, no decision means no buy.

What surprised me is how familiar the process felt.

Analysing a private business for acquisition is not a different skill from analysing a listed business for the stock market. It’s the same analytical engine, pointed at a different set of documents — and exposed to different kinds of risk.

Here are the principles that carry over almost perfectly.

1) You’re always buying future cashflows

In public markets, you buy a claim on a stream of future cashflows.

In private acquisitions, you buy the stream more directly — but it’s still the same question:

Will this business produce cash, reliably, after I own it?

Everything else is secondary.

  • “Net assets” are not cash.
  • “Revenue” is not cash.
  • “Profit” can be accounting.
  • Cash is cash.

If cashflow is weak, nothing else matters until you understand why.

2) Balance sheets are not comfort blankets — they’re lie detectors

A balance sheet is often misread as reassurance: “the business has assets”.

But in practice, the balance sheet is a stress test:

  • Are the assets real, liquid, and correctly valued?
  • Are the liabilities complete, current, and correctly classified?
  • How fragile is the equity buffer?

In the car detailing case, the balance sheet looked “repaired” a year later — but the repair was achieved by shifting pressure:

  • short-term creditors fell sharply,
  • long-term creditors appeared,
  • equity was barely above zero.

That tells a story: the business didn’t build a fortress; it just changed the shape of its obligations.

And then you ask the next question: what are the “assets” made of?

For a detailing business, “assets” can mean consumables, coatings, films, small tools, and basic equipment — items with:

  • low resale value,
  • rapid depreciation,
  • and sometimes expiry risk.

So the balance sheet can show “assets” without providing any meaningful downside protection.

This is identical to public markets: a company with “strong assets” can still be weak if those assets are illiquid, overstated, or operationally trapped.

3) Earnings quality matters more than earnings size

A business can show profit and still be financially sick.

You already know this from stocks:

  • aggressive revenue recognition,
  • capitalising expenses,
  • one-off gains,
  • underproviding for bad debts,
  • pushing liabilities out of sight.

Private businesses can do the same, just less formally.

The principle is:

I want boring profit. The kind that becomes cash without heroics.

If the accounts don’t allow you to verify that conversion, you don’t have earnings — you have a story.

4) Working capital is where businesses die quietly

In both public and private analysis, working capital tells you whether a business is self-funding or constantly borrowing oxygen.

Questions that matter:

  • Are receivables growing faster than sales?
  • Are payables being stretched?
  • Is “accrued income” doing heavy lifting?
  • Is the company surviving on timing tricks?

In the detailing case, the presence of accrual-like assets combined with creditor stress is exactly the kind of pattern that makes me cautious. Not because it’s automatically fraud — but because it means the business is exposed to timing risk, and timing risk becomes cashflow risk.

5) Moat exists in small businesses too — it just looks different

In listed equities, you look for durable competitive advantage: brand, network effects, scale, switching costs.

In a small business, the equivalents are practical:

  • repeat customers and retention,
  • a reputation that actually drives inbound demand,
  • location economics (footfall, access, convenience),
  • contracts (fleet work is fundamentally different from one-off walk-ins),
  • operational discipline (booking, deposits, capacity planning),
  • pricing power (can they raise prices without demand collapsing?).

A detailing business with mostly one-off customers and discounting is closer to a commodity than a moat.

This is not moral judgement. It’s economics.

6) Management integrity is an asset class

In public markets, management quality is often inferred.

In private acquisitions, you meet the management — and you see the quality of their reporting immediately.

If a seller cannot produce:

  • bank statements,
  • VAT returns (where relevant),
  • basic monthly numbers,
  • a clear breakdown of creditors,

then one of two things is true:

  1. the business is disorganised (which is a risk), or
  2. the business is hiding something (which is also a risk).

Either way, you are being asked to buy uncertainty.

And uncertainty is not something you “price in” casually. In small acquisitions, uncertainty is often lethal because you don’t get diversification.

7) Private acquisitions have “tail risks” that stocks don’t

Owning shares does not make you responsible for:

  • historical HMRC issues,
  • employment liabilities,
  • lease traps,
  • customer disputes,
  • warranties given to past clients,
  • undocumented loans,
  • director transactions.

Buying a business can.

That’s why the structure of the deal matters.

In the same way you demand a margin of safety in a stock, you should demand a margin of safety in deal mechanics:

  • asset purchase vs share purchase,
  • exclusions of liabilities,
  • warranties and indemnities,
  • retention/escrow,
  • earn-outs linked to verified cash receipts.

In other words: downside control is part of valuation.

8) Valuation is not a number — it’s a relationship between proof and risk

A stock’s valuation multiple implicitly assumes a certain quality of disclosure, auditing, and governance.

A private business with thin accounts and weak verification deserves a different treatment.

The rule I use is simple:

The less verifiable the cashflow, the less I pay upfront.

If the seller wants a confident valuation, the seller must provide confident evidence.

If they can’t, then the only rational offer is:

  • very low upfront,
  • and performance-based payments.

And if they reject that, that’s useful information too.

9) My acquisition checklist is basically my investment checklist

When I strip it down, the due diligence list for a small acquisition is the same as my stock analysis, translated into private documents.

Public market equivalents → Private acquisition equivalents

  • Revenue trend → VAT returns, booking logs, invoices
  • Cash conversion → bank statements
  • Balance sheet quality → creditor breakdown, loan agreements
  • Moat/retention → repeat customer data, contracts
  • Management integrity → consistency of records, clarity under questioning
  • Margin of safety → deal structure, escrow, earn-out

This is why I felt at home analysing the purchase: it was the same game, just with fewer guardrails.

10) The principle that saved me: No decision means no buy

In the end, I didn’t reject the business because I “proved it was bad”.

I rejected it because I couldn’t prove it was good.

That’s an important distinction.

In investing, the default state is not “buy unless disproven”. The default is:

do nothing until the evidence is strong enough.

No evidence → no conviction. No conviction → no decision. No decision → no buy.

That single rule prevents a lot of expensive lessons.

Closing thought

The market teaches you to think probabilistically, to respect uncertainty, and to demand a margin of safety.

Those habits translate extremely well to acquisitions — and arguably they matter even more, because an acquisition is concentrated risk.

If you can analyse a listed business properly, you already have most of the machinery required to analyse a private one.

The only thing you need to add is this:

In private deals, structure is part of analysis. You don’t just price risk. You design around it.

Disclaimer: This post is informational only and not financial, legal, or tax advice.