Evaluating Acquisition Targets: The 5 Phases I Run on Every Deal

Evaluating acquisition targets is the pre-offer process of pressure-testing a business across strategic fit, financial verifiability, operational risk, market position, and deal structure viability — before you spend a dime or sign a letter of intent. Done right, it kills 80% of deals early so you spend your time on the 20% worth writing an offer on. The goal isn’t to prove the deal is good. The goal is to prove it’s not bad.

Look, I’ve done 300+ deals over 30 years. The ones that made me money all cleared five specific evaluation phases. The ones that almost buried me? I skipped a phase or two because I liked the seller.

This page is the hub. Each phase links out to a deep-dive so you can drill in wherever you need to. Same framework we teach inside Dealmaker Academy.

Why Evaluation Beats Enthusiasm

Most first-time buyers get emotionally attached to a deal by week two. That’s when judgment dies. A repeatable evaluation framework keeps you honest — because the framework doesn’t care how much you like the seller or how clean the website looks.

Run every target through the same five phases in the same order. Deals that fail early cost you an afternoon. Deals that fail late cost you six figures in legal, accounting, and lost focus. Kill fast, close smart.

Phase 1: Strategic Fit — Is This Business In Your Lane?

Strategic fit is the test of whether the target sits inside your operating experience, network, and capital capacity — the “buy in your lane” filter. A great business you can’t run is not a great deal. A mediocre business you can 10x with your skill set often is.

The four fit checks I run first:

  • Industry lane. Do you understand this category, or do you need a paid education after close?
  • Owner-operator vs. owner-investor. Are you buying a job or an asset? Be honest.
  • Skill overlap. Do your strengths solve the target’s biggest weakness?
  • Capital and financing fit. Can you actually fund this, or are you chasing a deal you can’t close?

Deep dive on the buy-box filters I use before I make any offer: Assessing Potential Acquisition Targets — my 6-filter buy box.

Phase 2: Financial Verification — Prove the Numbers Are Real

Financial verification is the process of reconciling three years of tax returns, P&Ls, and bank statements to prove the earnings you’re being sold actually exist. The CIM is marketing. The numbers behind it are the deal. If they don’t reconcile, you don’t have a deal — you have a story.

The core financial checks:

  • Cash flow positive with DSCR ≥1.5x. Non-negotiable. Below 1.5, you’re gambling with debt service.
  • 3+ years of consistent profit. One good year is luck. Three is a business.
  • Add-back scrutiny. Sellers pad SDE. Question every add-back over $5K.
  • Working capital adequacy. Enough surplus cash in the business to operate day one? If not, price it in.

Deep dives: Business valuation methods, assessing market value, and the full financial due diligence checklist.

Phase 3: Operational Assessment — What Actually Runs the Business?

Operational assessment identifies what makes the business function day-to-day, what will break the moment the seller walks, and what post-close labor cost you’re actually inheriting. Half the businesses on the market are run out of the owner’s head. That’s a job disguised as an asset.

What to look at:

  • Owner dependency. If the seller works 40+ hours in the business, subtract the market cost of that role from earnings before you value the deal.
  • Documented SOPs. Systems on paper, or “we just do it that way”?
  • Key employees. Get retention agreements before close, not after.
  • Deferred maintenance. Broken equipment and old tech become month-one cash-out.

SWOT is the framework most buyers use to structure this: Dealmaker SWOT Analysis.

Phase 4: Market Position — What Happens Outside the Four Walls

Market position evaluates the target’s external environment — competition, customer concentration, supplier concentration, industry outlook, and platform risk — because outside factors set the ceiling on what you can earn. A great business in a dying industry is still a bad deal.

The market checks:

  • Customer diversity. No single customer above 15% of revenue. Above that is a weakness, not a strength.
  • Supplier concentration. One supplier controlling your inventory is a hidden threat.
  • Industry trajectory. Pull the 5-year outlook. Trade associations, IBISWorld, and category reports.
  • Platform dependency. Amazon, Google, one distributor — any of these can change terms overnight.
  • Cyclicality. Buying a cyclical business at the top is how buyers get underwater by year two.

Deep dive: Assessing market competition when buying a business.

Phase 5: Deal Structure Viability — Can This Deal Be Bought the Right Way?

Deal structure viability tests whether the seller will accept terms that make the numbers work — seller financing, earnouts, holdbacks, escrow — because focus on terms over price is what separates deals that close from deals that die. A seller-financed deal at 90% of asking with a 5-year note beats an all-cash deal at 70% of asking every time.

Structure levers to test early:

  • Seller financing. Will the seller carry paper? On what terms? Interest-free notes exist — I’ve closed dozens.
  • Earnouts and performance kickers. Bridges valuation gaps and aligns the seller with post-close reality.
  • Escrows and holdbacks. Protection against undisclosed liabilities. Non-negotiable on any deal above six figures.
  • Working capital peg. Fought over at every close. Set it in the LOI, not the definitive agreement.

Get offers in writing. No verbal promises. This is a win-win game — but only when both sides sign paper.

How the 5 Phases Fit Together

Run the phases in order. Phase 1 kills bad-fit deals in a day. Phase 2 kills fantasy numbers in a week. Phase 3 kills owner-dependent traps in the site visit. Phase 4 kills doomed markets before you write the LOI. Phase 5 tests whether the seller is workable before you spend on legal.

Score each phase pass/fail as you go. Any fail before Phase 5 is a walk. Fail at Phase 5 and you renegotiate structure or walk. This is a numbers game — originate deals, meet sellers, make offers, and only chase the ones that clear all five.

Deep Dives Into Each Phase

Every phase above has its own detailed article. Start with the one closest to where your next deal is stuck:

Frequently Asked Questions

What does it mean to evaluate an acquisition target?

Evaluating an acquisition target means pressure-testing a business across strategic fit, financial verifiability, operational risk, market position, and deal structure viability before making an offer. The point isn’t to prove the deal is good — it’s to prove it’s not bad. Most deals fail one of the first three phases and never justify a written offer.

What are the five phases of evaluating a target?

Strategic fit, financial verification, operational assessment, market position, and deal structure viability. Run them in that order. Each phase is a kill-switch — a fail at any phase either ends the deal or forces a renegotiation before you spend more time and money.

How long should evaluating a target take?

Phase 1 takes an afternoon. Phase 2 takes a week once you have financials. Phase 3 takes a site visit and a few interviews. Phase 4 takes a couple of days of industry research. Phase 5 runs in parallel with LOI negotiation. Full evaluation to signed LOI is typically 3 to 6 weeks — faster if the deal is clean, longer if it isn’t.

What is the biggest mistake dealmakers make when evaluating targets?

Skipping phases because they like the seller. Rapport matters — you need to know, like, and trust the seller — but rapport doesn’t replace the framework. Every deal gets the same five-phase pressure test regardless of how much you like the person on the other side of the table.

What is a DSCR and why does it matter?

DSCR is debt service coverage ratio — cash flow available to cover debt payments. A minimum of 1.5x is non-negotiable in our framework. Below 1.5, the business isn’t generating enough cash to safely cover debt plus your required return, and the bank likely won’t fund the deal anyway.

Should price or terms come first when evaluating a target?

Terms. Always terms. A seller-financed deal at 90% of asking with a 5-year note beats an all-cash deal at 70% of asking. Structure is where deals get won or lost — price is what beginners fixate on because it’s the only number they know how to compare.

What kills a deal fastest during evaluation?

Numbers that don’t reconcile. If tax returns, P&Ls, and bank statements don’t tell the same story across three years, walk. Same for undisclosed litigation, tax issues, or customer concentration above 30%. Deal killers get the red flag — no exceptions, no rationalizing.

Where can I learn to evaluate targets with a live coach?

Dealmaker Academy teaches the full five-phase framework with Carl Allen and the coaching team on real deals. The Protégé Community is where active dealmakers pressure-test each other’s targets in real time. Or book a coaching call to walk a specific target through the framework with our team.

Next move: take the next three targets in your pipeline and run them through Phase 1 today. The ones that clear go to Phase 2 this week. That’s how you build a real pipeline instead of chasing one deal for six months.

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