Financial profiles versus operating systems

Two companies can present identical financials and be entirely different businesses. One earns its margin from a durable position — trusted relationships, real switching costs, a capability competitors have not matched. The other earns the same margin from deferred maintenance, underpaid people, or a customer that has not yet re-bid the contract.

A spreadsheet cannot distinguish them. The distinction lives in the operating system: how work actually gets done, who the customers actually depend on, and what would actually happen if a key person, supplier, or account changed. That is where we spend our diligence time.

The four things we study first

Before building a model, we try to answer four questions in plain language:

  • Customers. Why do they buy, what would make them leave, and how concentrated is the dependence in either direction?
  • People. Where does the operating knowledge actually live, and how much of it walks out the door with one or two individuals?
  • Cash cycle. How does a dollar move through the business — when it is committed, when it is collected, and what breaks if the rhythm changes?
  • Dependencies. Which suppliers, platforms, licenses, or relationships could impair the business through no fault of its own?

None of these questions are exotic. What matters is answering them from evidence — conversations, site time, and system access — rather than from the confidential information memorandum.

Why we visit before we model

A model built before understanding the operation mostly encodes assumptions. The order matters: walk the floor, sit with the people who schedule the work and collect the receivables, watch how a customer issue actually gets resolved. Then build the model, so the numbers describe a business you have seen rather than one you have imagined.

This is also where respect for the seller shows. An owner who has spent decades building a company can tell within an hour whether a buyer is studying the business or performing a process. We would rather ask fewer, better questions in person than send a forty-page request list on day one.

Questions an owner should ask a buyer

Diligence runs both directions. An owner evaluating a buyer is choosing the next steward of their company, and deserves direct answers to direct questions: Who, specifically, will be making decisions after closing? What happened to the last three businesses you acquired — and may I speak with the people who ran them? What is your plan when the first bad quarter arrives?

Any serious buyer should welcome those questions. We do, and we encourage owners to put them to everyone at the table — including us.