Five numbers to check before you buy a company

A data room can hold thousands of files, and most deal teams try to read all of them. In the first week of a deal we look at five numbers instead. They tell us where to spend the rest of the time, and which questions to put to management first.

Customer concentration

What share of revenue comes from the ten largest customers? Above 40%, the business depends on a handful of relationships, and you need to know how many of them run through one person.

Ask when each of those contracts renews and whether any of them can end on a change of ownership. A large customer with a break clause can change the price of a deal on its own.

Churn by cohort

An average churn rate hides a lot. Group customers by the year they joined and follow each group. If recent groups leave faster than older ones, growth is being bought with sales effort that won’t last.

Do the same for revenue, not only customer counts. A business can lose many small customers and still grow if the ones who stay keep buying more.

Gross margin by product

Blended margins can look healthy while one product line loses money. Ask for margin by product and by customer segment, and check that the cost allocation makes sense.

Revenue per employee over time

If headcount grows faster than revenue two years running, ask why. Sometimes it’s a planned investment. Often it means the business is getting harder to run.

Cash conversion

Compare operating profit with the cash the business actually brings in. A gap that keeps widening usually points to slow-paying customers, growing stock or costs moved onto the balance sheet.

Ask for monthly figures for at least three years. Quarterly numbers smooth out exactly the swings you are looking for.

None of these numbers decides a deal on its own. Together they show where the real questions are and give your team a short list to take into management meetings.