Checklist and data request
The Upside Diligence Checklist
One upside claim marked up question by question, and a list of evidence to request.
Open the checklistWhere upside claims come from
When a teaser, a broker's memo or the seller's own pitch offers upside (answer the phone faster and bookings rise, chase the open quotes, win back the customers who went quiet), treat each line as a claim to check, and find out which part of it the records support.
Read the financial statements for what the business earned. Read the operating records for how many leads it booked, how many quotes it closed and how full the schedule ran: those are the numbers an upside story is built from. Between the books and your model, ask whether the business's own operating records support the figure, or whether it rests on someone else's targets and a few good weeks.
Where this sits in diligence
This is one strand of diligence. It sits beside the financial and legal review and replaces neither. The SBA's guide to buying a business puts it plainly:
Once you know whether you want to franchise or buy a business, you'll need to evaluate each specific opportunity. In short, it boils down to this: do your due diligence.
The same guide suggests hiring an attorney and an accountant, who typically help you create and evaluate documents such as the letter of intent, the financial statements and the tax returns.[1]
A quality-of-earnings report is a separate review by an accounting firm. The twelve questions below look at something else: the operating records an upside figure is built from.
None of this is investment advice or a valuation. Revvy does not say what a business is worth, and neither does this post.
How upside gets overstated
Each pattern below maps to questions on the Upside Diligence Checklist, which numbers them 1 to 12.
No records behind the figure (questions 1 and 12)
A figure that does not name the records it counted cannot be checked. Ask what was counted, over which dates, and whether you could rebuild the figure from its working: the formula, the records, the target and the range. Revvy holds itself to the same rule: it does not show a money figure that cannot show its working.
Borrowed targets (question 2)
Most upside is the gap between a current rate and a target. If the target is called an industry benchmark, ask for the source and its date. Revvy holds no benchmark data. Each of its default targets is labelled "Revvy's default, a judgement and not an industry figure", and the user can change it.
Gains that act on the same jobs (question 4)
Booking more leads produces more quotes, closing more of those quotes produces more jobs, and a higher average ticket raises the value of those same jobs. Add the three gains together and one job is counted three times. Ask how the gains were combined. Revvy counts one of booking and close rate in full and the other at a share, 40% by default, a judgement call the user can change. It shows the average-ticket what-if beside the total and never adds it in, and it shows the total line by line.
A few weeks scaled to a year (questions 5 and 6)
Ask how many days of records sit behind each yearly figure, and whether anyone allowed for the season. Revvy will not scale fewer than 60 days of records to a year, and from 60 to 364 days it notes that trades work is seasonal, so a part-year can over- or under-state a full one.
Then ask whether one-time lists are kept apart from yearly figures. Open quotes and lapsed customers are a stock that exists today, and they can be worked through once. Multiply them by twelve and you have priced quotes nobody wrote.
Revenue shown as profit (question 7)
Ask whether the figure is revenue or gross profit, and ask for the gross margin over the same period, from the books. Revvy works out profit only from a margin on file and never borrows one. Without a margin, its profit figure stays empty rather than estimated.
Jobs the schedule cannot run (question 8)
More bookings need more crew hours. Ask whether the business recorded its schedule capacity or someone inferred it from job counts. Revvy checks added jobs against recorded capacity, fills the open slots with the work worth most per job first, and scales down what does not fit. Where no capacity is recorded, it says the figures were not checked against the schedule.
The other four questions
- Question 3 asks whether the figure is a range or a single number. A single number claims more precision than operating records can support. Revvy gives a low, a mid-point and a high, and widens the band when the sample is small.
- Question 9 asks what share of leads comes from the top source. A business that depends on one channel depends on that channel's rules, and those can change. See Local Services Ads are moving: keep your lead data.
- Question 10 asks which checks had no data, and whether they were left out or counted as zero. A check with no records is unknown. Counted as zero, it makes a thin file look clean.
- Question 11 asks whose earnings basis and whose multiple turned the upside into a value. Revvy runs a valuation scenario only on an earnings basis and a multiple you supply, and labels it a scenario.
Question 4 in the demo
DemoContoso Plumbing & Drain: two gains on the same jobs
In Contoso's total, leads that never became booked jobs add $164K–$246K a year, and quotes presented but not sold add $44K–$66K a year. Both act on the same jobs, so Revvy does not add their full values: one counts in full and the other at a share, 40% by default, and both are scaled to fit the open slots on the schedule. That is question 4, answered the way a sound figure should.
Revvy's demo data covers two more businesses, each set up to show a different state of the analysis: one with too few days of records to score, and a strong operator with a low score. The Upside Diligence Checklist goes through what each of them shows.
Revvy's acquisition view sets businesses side by side, and in the demo data it holds all three. See the acquisition view in the demo. It compares them on revenue, gross profit, Opportunity Score, data coverage, lead-source concentration, conversion, repeat business, capacity used and estimated revenue improvement, with downside, base and upside scenarios.
Turn the gaps into a data request
Mark each question supported, partly supported, unsupported or not asked. Everything short of supported is your data request. The Upside Diligence Checklist does the marking on the page, suggests the evidence to ask for under each question, and prints the request. Nothing you mark there is saved or sent.
For the records themselves, Buying an HVAC or plumbing firm: records to ask for lists the six operating exports and the period to ask for, and the Records Checklist's buyer version turns them into a list to send with the request. Every worksheet is on the Resources page.
Questions people ask
What is a quality of earnings report, and is this one?
A quality-of-earnings report is a separate review by an accounting firm. This is not one. These twelve questions look at the operating records behind an upside figure, and they sit beside that review and your legal diligence, not in place of either.
Can a target's upside be added up across fixes?
Not by simple addition. Booking more leads, closing more quotes and raising the average ticket act on the same jobs, so adding the three gains counts a job more than once. Ask for the combined figure and how it was combined. Revvy does not add them: of booking and close rate, one counts in full and the other at a share, 40% by default, a judgement you can change, and the average-ticket what-if is shown beside the total, never added in.
How many months of records should I ask for?
At least twelve, so the records cover a full year of seasons. Set aside any yearly figure built on fewer than 60 days of records: Revvy will not scale that little to a year. If you also want to see customers who have gone quiet, ask for more than eighteen months of jobs.
Does Revvy value businesses?
No. Revvy's acquisition view compares businesses and runs downside, base and upside scenarios on their records. Its valuation scenario needs an earnings basis and a multiple that you supply, and it is labelled a scenario, not a valuation.
Sources
- U.S. Small Business Administration. Buy an existing business or franchise (opens in a new tab). No date shown on the page.General guidance, not specific to the trades. The page lists documents an attorney and accountant typically review: letter of intent, confidentiality agreement, contracts and leases, financial statements, tax returns, sales agreement, purchase price adjustment.