No one ratio should end a deal by itself, and no Canadian source publishes a single pass/fail threshold for most of them. What works is reading several together, on the target’s own trend, before committing real diligence money.
Key takeaways
A buyer with a stack of three years of financials and a limited amount of time before committing to real diligence spend needs a small number of ratios that can be checked quickly and read together, not one master number that decides the deal alone. Some of these have a real, sourced Canadian benchmark. Most do not — and the honest way to use the ones without a published number is as a trend across the target’s own history, not as an invented cutoff.
Debt-service coverage is the exception in this list: it has an actual sourced band. Deavo’s own financing tool publishes debt-service coverage targets of “≥ 1.25× on SDE” for smaller deals and “≥ 1.30× on EBITDA” for larger ones, alongside a worked $750,000 example showing estimated monthly debt service of $5,579, annual debt service of $66,900, and a resulting DSCR of 3.88× against the business’s own cash flow. (deavo.ai/financing) Running the target’s trailing cash flow against the proposed debt load, at the buyer’s own contemplated structure, before spending on formal diligence is the cheapest go/no-go check available — a deal that fails this test at the buyer’s own proposed financing structure is unlikely to pass once a lender runs the same math with their own conservatism layered on top.
Deavo’s own due-diligence checklist lists “key customer/supplier contracts and revenue concentration” as a factor to identify during operational diligence, without attaching a percentage threshold anywhere. (deavo.ai/insights/due-diligence-checklist-first-time-buyers) No Canadian source in this market publishes a specific cutoff percentage either, and inventing one — “anything over 30% is a red flag” — would be exactly the kind of unsourced benchmark worth avoiding. What is useful and genuinely checkable is the trend: is the largest customer’s share of revenue growing or shrinking across the three years of statements, and separately, has any single customer relationship existed “only through the owner, with no one else on staff who has met the client”? (deavo.ai/insights/owner-dependence-the-quiet-discount) A shrinking, diversifying customer base with no single owner-only relationship reads very differently from a growing single-customer share, even at the same headline concentration percentage.
Two more items on deavo’s own red-flag list translate directly into simple ratios read across time rather than a single snapshot. “Accounts receivable growing faster than revenue” is an AR-to-revenue ratio — calculate it for each of the three years and watch the direction, not just the level. “Rising inventory levels without a matching increase in sales” is the same idea applied to inventory-to-revenue. (deavo.ai/insights/reading-financial-statements-before-you-buy) Neither ratio has a published healthy range in this market, and neither should be treated as if it does — what a buyer can genuinely check is whether the ratio is stable, or whether it is drifting in a direction that suggests receivables are getting harder to collect or inventory is not moving, both of which are real operating signals whatever the absolute number happens to be.
The same source’s red-flag list includes “margins that move significantly from year to year without an obvious explanation” — and it is worth taking that literally in both directions. An unexplained improvement is not automatically good news; it can mean an add-back was applied inconsistently, or a one-time gain was folded into ongoing operations. The same source notes “two accountants reviewing the same books can reasonably normalize a few borderline items differently,” which is exactly why the question to ask about a margin swing is how consistently add-backs were applied year to year, not just whether the number moved.
A buyer screening a $1.4 million target runs four checks before committing to formal diligence. DSCR at the proposed structure comes out to 1.6× on an SDE basis — comfortably clear of deavo’s 1.25× band. The top customer’s share of revenue has grown from 18% to 31% over three years, with the same customer relationship handled entirely by the owner. AR-to-revenue has held flat at roughly 9% across all three years. Gross margin swung from 34% to 41% and back to 35% with no note in the file explaining the middle year. On the numbers alone the DSCR and AR checks pass cleanly; the concentration trend and the unexplained margin swing are both real questions, and together they are enough to justify a scoped diligence request — ask specifically for what changed with the top customer and what happened in the middle year — before committing to the full diligence budget.
The value of running four checks instead of one is that they can disagree, and the disagreement is informative. A DSCR comfortably above the published band says the business can service debt today; it says nothing about whether it can keep doing so if the concentrated customer leaves. A stable AR ratio says collections are not currently deteriorating; it does not explain a margin swing that has no note attached to it. None of the four checks on their own is a reason to walk away from this target — together, they are a reason to ask two specific, answerable questions before spending diligence money rather than a general one. That is the actual function of a ratio screen at this stage: not a verdict, a question list with a size attached, so the diligence spend that follows is scoped to what is genuinely uncertain rather than a blanket review of everything.
Related: reading three years of statements in an hour, the guide on running financial diligence without a Big Four firm, and the case file on walking away in week two on a single number.
No Canadian source in this market publishes one, and stating a specific number here would be inventing a benchmark that does not exist. What is checkable is the trend in the AR- and inventory-to-revenue ratios described above, read across three years rather than as a single snapshot.
It can offset a lender’s concern, since the debt-service test is what the lender actually measures. It does not offset the underlying business risk — a business that comfortably services its debt today but depends on one customer the owner personally manages is still exposed to that customer leaving, whatever the DSCR happens to be.
A short call is enough to walk through which of these actually apply to the target you’re screening.
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