Every acquisition starts with the numbers. The debt service coverage ratio has to work, the cash flow has to support the loan, and the financial model needs to make sense. Those are the minimum requirements for getting a deal done. The mistake many buyers make is believing that once the numbers work, the decision is easy. In reality, the financial model is only one part of evaluating a business.
The Fleming Deal Score
Over the years, we've developed a framework we call the Fleming Deal Score to evaluate businesses across multiple dimensions. The financial model still matters, but it sits alongside several other characteristics that often have an even greater impact on long-term success. Of all the criteria we evaluate, buyer fit receives the greatest weight. We believe the person operating the business has a larger influence on the outcome than almost any other variable.
We've seen this firsthand across our own portfolio. Our restaurants perform well because they're run by experienced restaurant operators. Our HVAC company succeeds because it's led by someone with deep HVAC experience. If we swapped those operators, both businesses would likely struggle. The right operator in the right business creates an advantage that no spreadsheet can fully capture. When we evaluate buyer fit, we're looking for someone with meaningful industry experience and a track record of leading people. Someone with no management experience and no industry knowledge starts at a significant disadvantage.
Organizational structure is another important consideration. A business with an experienced general manager, strong department leaders, and established systems can be much more forgiving than one where the owner does everything. Buyers often underestimate how much easier the transition becomes when capable management is already in place. A well-structured organization provides stability while a new owner learns the business.
We also evaluate seasonality, customer concentration, EBITDA margins, longevity, valuation, cyclicality, cash conversion, working capital requirements, and overall stability. None of these factors exists in isolation. A business with narrow margins and significant seasonality creates different risks than one with recurring revenue and healthy cash flow. Likewise, a company that has operated successfully for fifty years has already demonstrated an ability to survive changing economic conditions, while a business that’s only been around a few years has much less history to evaluate.
The cash conversion cycle is overlooked
Buyers often focus on profitability without paying enough attention to when cash actually enters and leaves the business. A company may appear highly profitable on paper, but if it has to pay employees and suppliers long before customers pay their invoices, it can create significant working capital challenges. Understanding how cash moves through the business is just as important as understanding how much profit it generates.
The Deal Score has also reinforced another lesson we’ve learned over time. Businesses rarely score well in every category. More often, buyers are balancing strengths against weaknesses. We recently compared two opportunities. One became an acquisition that has performed exceptionally well. The other looked attractive primarily because of its low valuation. Once we evaluated both businesses across all of the criteria, it became clear why the cheaper business was available at such a discount. Its low price reflected weaknesses in several other areas that would have made ownership much more difficult.
A wonderful company at a fair price
That leads directly to one of Warren Buffett’s most quoted ideas: "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price." We see that principle play out repeatedly in small business acquisitions. Buyers are often drawn to low multiples because the financial model looks exceptional. They assume buying at one-and-a-half or two times earnings guarantees a great investment. Unfortunately, those businesses are frequently cheap for a reason. Weak management teams, poor organizational structure, difficult working capital dynamics, or customer concentration problems eventually erase the apparent bargain.
A stronger business often tells a different story. The purchase price may feel expensive, and the debt service coverage ratio may leave less room for error, but the underlying business has the characteristics needed to create value over time. It has experienced management, healthier cash flow, stronger customer relationships, and a proven operating history. Those qualities rarely show up as dramatically in a spreadsheet, yet they often determine whether an acquisition succeeds.
We've seen buyers celebrate acquiring businesses at remarkably low multiples, only to discover that the operational challenges quickly consume the savings they thought they captured. The inexpensive acquisition becomes very expensive after closing. By comparison, paying a fair price for a high-quality business frequently produces better long-term results because the company already has the foundation needed for continued success.
Even Buffett changed his mind
Early in his career, Buffett followed Benjamin Graham's approach of buying deeply discounted companies. After partnering with Charlie Munger, his focus shifted toward acquiring exceptional businesses with durable competitive advantages. Valuation always matters, but it should be considered alongside the many other characteristics that determine whether a business will continue creating value long after the closing table.
About the author
Mark Fleming, CFA, FRM
Mark Fleming is the co-founder of Owner Actions, where he partners with experienced operators to acquire and grow small businesses. He has participated in more than 40 business acquisitions and has evaluated thousands of businesses across dozens of industries. Drawing on a background in portfolio management, financial analysis, and business ownership, Mark helps entrepreneurs identify high-quality acquisition opportunities and build businesses for long-term success.