Most successful business sales begin with a profitable company and clean financial statements. When those elements are missing, the buyer pool becomes dramatically smaller, and the sale process becomes far more difficult.
Understanding how buyers evaluate financial performance is an important part of preparing for a transaction. If you are considering selling, it is helpful to understand what buyers look for before beginning the process.
This case illustrates what happens when the financial picture changes during analysis and how the situation was ultimately resolved.
The Situation
The seller owned a regulated healthcare manufacturing and packaging company located in the western United States. The business had been operating since 1983 and generated approximately $3.5 million in annual revenue.
The company employed 13 staff members plus the two owners. Several employees maintained long-standing customer relationships that had developed over many years.
The owner decided to explore selling the business and engaged me in February 2023.
Based on an accountant’s valuation prepared years earlier, when the company had been profitable and growing, the seller believed the business was worth approximately $4.5 million.
Before beginning the marketing process, I conducted a detailed review of the financial statements to determine how buyers would evaluate the opportunity. Understanding realistic market expectations is an important first step when preparing to sell a business.
Discovery During Financial Review
During the financial analysis, several inconsistencies appeared in the income statements.
After reviewing the underlying transactions, it became clear that certain expenses had been misclassified by the bookkeeper. When those entries were corrected, the financial picture changed significantly.
What initially appeared to be a profitable business was actually operating at a loss.
The seller’s CPA reviewed the adjustments and confirmed the revised financial picture.
This discovery fundamentally changed the likely outcome of the transaction.
What the Seller Expected vs Market Reality
At the beginning of the engagement, the seller believed the business was worth approximately $4.5 million. This expectation was based on an accountant’s valuation prepared many years earlier when the business had been profitable and growing.
However, once the financial statements were corrected and the business was shown to be operating at a loss, the market viewed the opportunity very differently.
Buyers evaluate businesses primarily based on current profitability and future cash flow. When a business is losing money, buyers typically value the opportunity based on assets, customer relationships, or the potential to restructure the operation.
Understanding how buyers think about transactions can help sellers avoid unrealistic expectations during the process.
Market Reality
Once the corrected financials were understood, the buyer pool narrowed significantly.
Businesses operating at a loss attract a very different type of buyer than profitable companies. Many of the interested parties were small operators or individuals exploring the opportunity but lacking the financial capacity or seriousness required to complete a transaction.
Negotiations with several prospective buyers became difficult, frequently focusing on minor details rather than the larger opportunity.
This is a common pattern when a business lacks profitability. Strong, well-capitalized buyers typically focus on companies that are already generating consistent earnings.
A Practical Solution
After an extended search, a buyer based in Southern California proposed an alternative approach.
Rather than purchasing the business immediately, the parties agreed to begin with a drop-shipping arrangement in December 2024. Under this structure, the buyer began selling the company’s products while the seller gradually shut down the existing facility.
This structure solved two immediate problems:
• The seller could close the facility and stop ongoing operating losses.
• The buyer could become familiar with the products, suppliers, and customers before committing to a full acquisition.
During this period, several key employees who maintained customer relationships were hired by the buyer, helping ensure continuity for existing customers.
After operating under this structure and gaining confidence in the business, the buyer moved forward with the acquisition.
Understanding how deal structures work is important because the structure of a transaction often determines whether a deal can be completed.
The Outcome
The transaction ultimately closed as an asset sale in November 2025.
The seller was able to exit the business and eliminate the ongoing losses associated with operating the facility.
The buyer gained an established product line, experienced employees, and long-standing customer relationships after first validating the opportunity through the drop-shipping arrangement.
While not a traditional sale process, the structure allowed both parties to reach a workable outcome.
Key Lessons
Several important lessons emerged from this transaction.
Accurate financial statements are essential.
Accounting errors can significantly change the value and marketability of a business.
Profitability strongly influences buyer quality.
Profitable companies attract larger pools of qualified buyers.
Preparation before going to market matters.
Carefully reviewing financial statements before launching a sale process can prevent difficult surprises during buyer due diligence.
Deal structure matters.
When a traditional sale is not possible, alternative structures can sometimes create a path forward.
Transaction Summary
Seller: Confidential Healthcare Manufacturing & Packaging Company
Buyer: Strategic Buyer – Southern California
Structure: Asset Sale
Revenue: Approximately $3.5M
Employees: 13 + 2 Owners
Engagement: February 2023
Reseller / Transition Phase: December 2024
Transaction Closed: November 2025