Smart entrepreneurs today are focusing on due diligence for smarter acquisitions rather than building from scratch. The entrepreneurial landscape has shifted dramatically. Influenced by thought leaders like Codie Sanchez, today’s smart entrepreneurs are increasingly choosing acquisition over building from scratch. But here’s what many miss: the due diligence process can make or break your investment.
In this article — Part 1 of our Build vs Buy series — we’ll dive into the acquisition side. In Part 2, we’ll explore the “build” path and share strategies and programs to help entrepreneurs start from scratch.
Acquisition offers immediate cash flow, established customers, and proven market validation—but only when you buy the right business at the right price. Through our work with business acquirers across Canada, we’ve identified five essential principles that separate successful buyers from those who struggle:
1. Evaluate Management Track Record
Before committing capital, assess current leadership. Has the owner navigated economic downturns or competitive pressures? Quality financial reporting indicates business sophistication—if they can’t provide detailed statements, that’s a red flag. Most importantly, determine if you’re buying a business or just buying yourself a job. How will the owner(s) support transition to a new buyer? You will need to assess customer retention risk as part of evaluating the deal.
2. Analyze Market Fundamentals
Are key demand drivers strengthening or weakening? Growing customer base and expanding markets indicate strong fundamentals. What do customer find unique about this particular business versus key competitors? Understand the competitive landscape and any regulatory changes that could impact operations. Market conditions change rapidly, making updated data crucial.
3. Scrutinize Financial Projections
Challenge revenue assumptions—are they based on historical performance or speculation? Examine customer concentration and recurring revenue patterns. Look for hidden operating costs and understand working capital requirements to prevent post-acquisition surprises. If you are planning to finance the acquisition you will want to engage lenders early to understand the capital stack and model cash flow to ensure there is sufficient cash flow available to service your business loan.
4. Stress-Test Downside Scenarios
What happens if your top customers walk away? Can the business maintain profitability if costs increase 15%? Analyze multiple scenarios including supply chain disruptions and economic downturns to develop contingency plans. Has your agreement been drafted to protect you from the seller competing with you post close?
5. Understand Deal Structure and Tax Implications
How is the purchase price allocated between assets, goodwill, and earnouts? Ensure adequate legal protections against undisclosed liabilities. Budget for integration costs—system alignment and process standardization often impact returns more than buyers expect.
Will you purchase the existing corporation from the seller or do an asset sale? There are pros and cons to each and major benefits to the seller including the Lifetime Capital Gains Exemption (LCGE) which is a major incentive for the seller to shelter capital gains and a bargaining chip in your deal negotiations!
Summary
The “build versus buy” decision comes down to risk tolerance and growth timeline. For many entrepreneurs, acquisition offers a faster path to business ownership, but success requires due diligence for smarter acquisitions and proper financial planning.
This article has focused on the “buy” side of the equation. In Part 2, we’ll explore the “build” side — including tips, programs, and resources (such as Business Development Bank of Canada – BDC’s guides) to help founders launch and scale from the ground up.
The most successful acquirers prioritize risk management and operational excellence over potential returns alone. Having the right financial partner from the start makes all the difference in structuring deals for optimal outcomes.
Are you ready to grow?
Whether you’re evaluating your first acquisition or scaling an existing business, Finalyze helps you structure smarter deals and plan sustainable growth. Get a tailored financial roadmap — book your complimentary growth session today and move forward with confidence.