Due Diligence: What to Check

Diligence is where great acquisitions and expensive mistakes part ways. The goal is simple: confirm the business is what the seller says it is, and find what they didn’t mention.

Confirm the earnings are real

The asking price rests on the earnings, so verify them. Tie the SDE add-backs to actual records — tax returns, bank statements, and the books should agree. Be skeptical of aggressive add-backs and round numbers. This is the heart of a “quality of earnings” review, and it’s where a good accountant earns their fee.

The four risks that sink small deals

• Customer concentration. If one or two customers are a large share of revenue, the business is one phone call from a very different valuation.
• Owner dependence. The single biggest Main Street risk: if the relationships, know-how, and goodwill walk out with the seller, you bought a job, not a business. Probe what actually breaks when the owner leaves.
• Key people. Will the crucial employees stay? What are they paid, and are they a flight risk after the sale?
• The real reason for sale. “Retirement” is often true — but confirm it isn’t a looming lease loss, a new competitor, a regulatory change, or eroding margins.

The paper trail

Read the contracts, leases, and licenses; confirm they transfer to you. Check for liens, lawsuits, unpaid taxes, and warranty or environmental liabilities. And structure the purchase with the future in mind — how you hold the business affects a later sale (see the QSBS Field Note). This is the point to lean on professionals — an accountant for the numbers and an attorney for the paper.