Three-Part 80% Deal Screen
Triangulate earnings, taxes, and the vital operating driver
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 99%
The Three-Part 80% Deal Screen uses three evidence sources to reach an informed first view of a business. Start with a detailed profit and loss statement showing what the company earns and spends, preferably by week or month so seasonal swings remain visible. Compare it with tax returns, because owners have less incentive to overstate income when reporting to the tax authority. Then identify the industry-specific variable that disproportionately controls performance: a car wash's lease, utilities, equipment, and traffic count are examples. Reconcile discrepancies and stress-test that vital driver. This gets the buyer most of the way to deciding whether a deal merits further work, but Sanchez explicitly notes that the remaining detail can still determine the outcome.
Origin
Sanchez distilled the first acquisition screen into a P&L, tax return, and the business-specific 20% of variables that drive most success.
Core principles
- 01Monthly detail exposes seasonality hidden by annual totals
- 02Tax returns provide an external check on owner-prepared accounts
- 03A small number of industry variables drive most deal outcomes
- 04An initial screen is not complete due diligence
How to run it
- 1
Collect the P&L
Obtain a profit and loss statement that shows revenue and expenses in enough detail to understand operations.
Watch out A top-line sales figure does not reveal whether the business produces cash.
- 2
Expose seasonality
Expand annual figures into monthly or weekly periods and inspect changes in both sales and costs.
Pro tip Ask what operational event explains each large swing.
- 3
Collect tax returns
Obtain the corresponding filed returns as an external check on owner-prepared accounts.
Watch out Tax returns can contain legitimate accounting differences that still need explanation.
- 4
Reconcile the records
Match the P&L and tax figures, investigate discrepancies, and normalize only adjustments supported by evidence.
Watch out Do not accept verbal explanations without documents.
- 5
Find the vital driver
Identify the small set of leases, assets, utilities, customers, or other variables that controls most of this business's outcome.
Pro tip Ask what would make an otherwise profitable company fail fastest.
- 6
Decide whether to deepen
Stress-test the vital driver and advance only deals whose economics remain credible into complete diligence.
Watch out The initial screen is eighty percent, not permission to skip the decisive twenty percent.
In the wild
A buyer reviews monthly profit and loss statements, matches reported earnings to tax returns, then focuses on the property terms, water and electricity expense, equipment condition, and passing car count. A weak traffic count makes optimistic marketing projections irrelevant.
→ The buyer quickly identifies whether the economics justify full legal, financial, and technical diligence.
Common mistakes
Reading annual totals only
Annual figures can conceal seasonal periods when revenue collapses or costs spike.
Stopping at eighty percent
The unresolved twenty percent can contain the lease, asset, customer, or legal issue that breaks the deal.
Is it for you?
Best for
Buyers conducting an initial financial and operational assessment of an understandable small business.
Not ideal for
Complex or regulated acquisitions where many interdependent liabilities require specialist diligence from the outset.
From the transcript
“there's three things you need to get 80% of the way to a deal”
“first, you need a profit and loss statement”
“the second thing you want is their tax return because they put together the P&L, but the IRS puts together the tax return”
From the episode
Codie Sanchez: How to Get Rich Buying a Business No One Wants
Codie Sanchez