Why Private Financials Are a Different Animal
The first thing to understand is that private company accounts are not built to tell you the story of the business. They’re built to satisfy a compliance requirement. That distinction matters more than most first-time buyers appreciate.
A public company’s financials are scrutinised by analysts, auditors, and investors looking for exactly the kind of clarity that makes a business easy to value. Private company financials are prepared by an accountant whose primary job is to minimise the tax bill, not to present the business in its most investable light.
That means the numbers you’re looking at have been shaped by decisions that have nothing to do with how the business actually performs. Owner salary set at whatever made sense for personal tax planning. Depreciation schedules that don’t reflect the real economic life of the assets. Related-party transactions that look like costs but are really distributions. Rent paid to a property the owner holds personally.
None of this is fraud. It’s just the reality of how private businesses are run. And understanding it is the foundation of reading the financials properly.
The Five Numbers That Tell You the Most
Experienced acquirers don’t read private financials sequentially. They go straight to the numbers that carry the most signal and work outward from there. Here are the five that matter most.
Gross margin and whether it’s moving
Gross margin tells you how much of each pound of revenue the business keeps before overheads. But the number itself matters less than the trend. A gross margin that has been quietly compressing over three years is one of the most important stories in a set of private accounts and one of the easiest to miss if you’re only looking at the current year.
Compression can mean pricing pressure, rising input costs, a shift in the customer mix toward lower-margin work, or a business that has been winning revenue at the wrong price to hit top-line targets. Any of those is a conversation worth having before you sign anything.
Owner compensation
This is the number most first-time buyers underestimate. In a private business, owner compensation rarely appears in one place. There’s the salary. There are dividends. There are pension contributions. There’s the car on the company. There’s the phone, the travel, the home office. There are sometimes family members on the payroll doing jobs that may or may not need doing.
The reason this matters is that when you normalise EBITDA, you need to strip all of this out and replace it with the actual cost of running the business under your ownership. Get this wrong and your adjusted earnings figure (the number you’re paying a multiple on) is wrong. And that mistake compounds fast.
Working capital and what normal looks like
Working capital is the cash the business needs to operate day to day, the difference between what it’s owed and what it owes, relative to the revenue it’s generating. Most buyers focus on the EBITDA and treat working capital as a closing adjustment. That’s a mistake.
A business that has been managing its working capital aggressively ( stretching payables, pushing customers to pay faster ) can look healthier than it is right up until the moment you take over and the cash position normalises. Understanding what a normal working capital cycle looks like for this specific business, in this specific industry, is essential before you agree what “normalised” means at closing.
Capital expenditure: maintenance vs growth
The capex line in a private business’s accounts is almost always understated. Private owners tend to defer maintenance investment in the years before a sale not necessarily deliberately, but because the business feels like it’s running fine and the cash is more useful elsewhere. What you’re buying, underneath the EBITDA, is an asset base that may need significantly more investment than the historical accounts suggest.
The distinction between maintenance capex and growth capex also matters enormously. Maintenance capex is the cost of standing still, replacing equipment, maintaining systems, keeping the facility operational. Growth capex is optional. Confusing the two leads to free cash flow projections that don’t hold up in year two of your ownership.
Revenue by custome
The total revenue line is almost the least useful number in the accounts. What matters is the composition underneath it how many customers, how concentrated, how sticky, and how the mix has changed over time. A business with twenty customers where the top three represent 70% of revenue is a fundamentally different risk profile from a business where the top twenty customers each represent 5%.
Private businesses are not required to disclose customer-level revenue. Getting this information requires asking for it specifically and then doing the work to understand what you’re actually looking at once you have it.
The Questions Experienced Buyers Always Ask
Reading the financials is only half the job. The other half is knowing which questions those numbers should generate and having the confidence to ask them directly.
| What you see in the accounts | The question worth asking |
|---|---|
| Revenue growth that accelerated in the last 12 months | “What specifically drove the acceleration and is it recurring?” |
| Gross margin that compressed two years ago and recovered | “What caused the compression and what changed to bring it back?” |
| A large one-off cost in the most recent year | “Walk me through exactly what this was and why it won’t recur.” |
| Payables that increased significantly in the final year | “Has your payment behaviour with suppliers changed recently?” |
| A customer who appears in year one and two but not year three | “What happened with this customer and is there any ongoing relationship?” |
| Capex well below the industry average for several years | “What investment has been deferred and what would it cost to address?” |
| Owner salary that seems low relative to the role | “How has your compensation been structured and what does a replacement cost?” |
What Takes Years to Learn and What AI Accelerates
The reading ability that experienced acquirers have isn’t magic. It’s pattern recognition built from exposure, having seen the same red flags appear in different businesses enough times that they’re instantly recognisable. That pattern recognition is exactly what an AI copilot brings to a first or second-time search funder.
When you upload a set of private company financials to Kudra, it doesn’t just read them, it reads them the way an experienced acquirer would. It looks for margin trends across periods, flags owner compensation that may be understated, identifies working capital movements that deserve explanation, and surfaces the customer concentration risks hiding beneath the headline revenue number.
It then tells you what it found and what to ask about it. You walk into the management meeting already knowing where to probe: which is a completely different conversation from walking in hoping the right questions come up naturally.
