The method
The Arcane Method
Seven stages, each with a question to answer and a reason to walk away. Most bad acquisitions fail at a stage the buyer skipped.
Six steps through the workbench
- 01PrepareKnow your meansCapital, time and your support team.
- 02DefineWrite your criteriaSet the boundaries of your search.
- 03ModelFollow the cashPrice, earnings, financing and reserves.
- 04SearchFind a candidateScreen your records or search public listings.
- 05VerifyBuild the evidenceNineteen checks, with notes and risk flags.
- 06DecideKeep your reasoningAdvance the deal or record why you pass.
Buying a business is not one decision. It is a long series of small ones, and each one narrows the field. The method below puts those decisions in order so the expensive work (lawyers, accountants, quality-of-earnings reviews) happens only on deals that have already survived the cheap work.
1. Define the deal you want
Before looking at a single listing, write down what you are buying and why. Four numbers do most of the work:
- Price range. What you can finance, given your available cash for the equity injection (at least 10% of total project cost for an SBA initial acquisition) and any costs or reserves not financed in that project.
- Minimum cash flow. The seller's discretionary earnings (SDE) the business must produce to pay its debt, pay you a living wage, and leave a reserve.
- Maximum multiple. A ceiling on price divided by SDE. The workbench defaults to 3.5 and flags anything above 4.
- Minimum operating history. Three years of tax returns is the practical floor for most lenders.
Add the constraints that are personal: industries you understand, how far you will commute, whether you will run it yourself or hire a manager. Write them in the workbench's Scout filters so every listing is judged by the same standard.
2. Source deliberately
Listings on marketplaces are the visible minority of businesses for sale. Use them, but also build a pipeline from brokers, accountants and attorneys who serve small businesses, industry associations, and direct outreach to owners near retirement. Record every candidate, including the ones you reject, with the reason. A rejected deal with a written reason teaches you more than a vague memory.
3. Screen in minutes
The first pass asks one question: is there any version of this deal that could work? Enter the asking price and SDE in the workbench, and look at three numbers:
- The multiple (price divided by SDE).
- Debt service coverage (cash available for debt divided by annual debt payments).
- Cash-on-cash return (cash left after debt divided by the cash you put in).
These combine into the Arcane Score. A low score is not a verdict on the business. It is a verdict on the asking price and structure. Many good businesses are listed at prices that do not work.
4. Value from evidence
A listing's SDE is the seller's claim. Your job is to rebuild it from tax returns, bank statements and the general ledger. Read What SDE is and how to rebuild it before you trust any add-back. Then value the business on the earnings you can verify, adjusted for the risks you found. The multiple is an output of that judgment, never an input.
5. Structure and finance
Price is only half of a deal. The other half is how it is paid: buyer equity, a bank or SBA loan, a seller note, sometimes an earnout. Structure changes risk. A seller who carries a note shares the downside if the business underperforms. Model each structure in the SBA loan calculator and seller note calculator, and read How SBA 7(a) loans work for acquisitions.
6. Verify everything
Due diligence starts after a letter of intent and runs until closing. The workbench tracks nineteen checks across financial, operational, legal and market risk. The due diligence checklist explains what each one means and what a bad answer looks like. Budget for a quality-of-earnings review on any deal large enough to justify it.
7. Close and take over well
The deal is not done at closing. The first months decide whether customers, employees and suppliers stay. Plan the transition before you sign: what the seller will do and for how long, who you will meet first, and what you will not change in the first ninety days. See The first 100 days.