What is on a buyer's due diligence list?
A buyer's diligence list, sent after the letter of intent is signed, covers every part of the business: financial statements and tax returns, customer and supplier contracts, leases, licenses, employees and their terms, insurance, claims and disputes, systems, and anything else that could change the earnings the buyer has underwritten. It is long.
The buyer's accountants run a Quality of Earnings review on the numbers. The buyer's lawyers read the contracts. Its operating team asks how the work actually gets done. Every answer is checked against the CIM, against the documents in the data room, and against what management said in the meetings.
None of this is hostile. A buyer is about to pay a multiple of earnings for a business it did not build, and diligence is how it makes sure the business is what it was told. But it is thorough, and it happens at the point in the process when the founder has the least leverage.
Every business has issues. The only question is who finds them first.
Where do these ten red flags come from?
From the flags founder-led businesses raise again and again when a buyer reads them: the yellow and red flags the Go-To-Market Analysis looks for from a buyer's side of the table, and the Diligence Flags section of every deal workbook records. Each flag is recorded the same way: the finding, our observation about it, and the read-through to price or structure.
Yellow and red is a mark, not a ranking. The ten below are in no order of importance, because what each one costs depends on the business it is found in.
None of them is fatal on its own. Each is a reason for a buyer to lower the price, defer part of it, or ask for more protection, unless it has already been dealt with. These ten are worth checking for in any business before it goes to market.
1. Customer concentration
One customer, or a few, account for a large share of revenue. A buyer reads it as the risk that one decision outside the business could remove a large piece of it overnight, and prices that risk directly: often with a lower multiple, or with part of the payment as an earn-out tied to that customer staying.
The fix
Frame it. A large customer cannot be diluted in a few months, so disclose the concentration early, with what makes it safer than it looks: a long contract, a long relationship, and a plan to diversify. A concentration that comes with those reads very differently from one a buyer discovers on its own.
2. Owner dependency
The founder holds the relationships, the pricing, or the license, and the business has not shown it can run without them. A buyer is paying for what continues after the founder leaves, so it prices the dependency three ways together: a lower multiple, more of the price deferred into an earn-out, and a longer transition.
The fix
Frame it, and show the movement. A buyer will not take your word that the business runs without you; it looks at who signs, who sells, and who the customers call. Show what has already passed to the team, the relationships handed over and the decisions others now make, with a plan for the rest. The work starts now, whatever the date of the sale.
3. Books on a cash basis, or never reviewed
Revenue and costs are recorded when cash moves, and no outside accountant has looked at the statements. The buyer's accountants rebuild the earnings in the Quality of Earnings review, and books they cannot rely on cast doubt on every other number the founder presents.
The fix
Fix it. Books can move to an accrual basis, closed monthly and reconciled to the bank, and an outside accountant can review the statements. It is one of the fixes that removes a flag entirely, so it comes first.
4. Add-backs without documents
Adjustments to earnings that the founder can explain but cannot prove. The buyer's accountants test every add-back in the Quality of Earnings review, and one without a contract, invoice, or payroll record behind it is the first to go. One that fails can cast doubt on the rest of the list.
The fix
Fix it. Document each add-back before any buyer sees the list, with the record that shows the cost will not follow the business to its new owner. The Go-To-Market Analysis does this line by line with your CPA, to find every add-back that can be defended.
5. Personal expenses in the business
Costs that belong to the founder run through the company, blurring what the business really spends. A buyer has to separate them before it can trust the earnings, and every one it finds on its own is a question about the next.
The fix
Fix it. Take personal expenses out of the business before the trailing twelve months a buyer reads, and document the ones that remain as add-backs.
6. A license in the owner's name
A license the business needs to operate belongs to the founder, not the company. A buyer is paying for the right to keep operating, so a license that does not come with the business is a gap in what it is buying.
The fix
Fix it where you can. A license can sometimes be moved to the company before going to market; where it cannot, frame it with how it will pass to the new owner, and take the question to your attorney early.
7. Missing or non-assignable contracts
Key customer or supplier relationships with no written agreement, or agreements that cannot move to a new owner without consent. A buyer looks for change-of-control clauses in the best customer and supplier contracts, because they let the other party end or renegotiate the agreement when the company is sold.
The fix
Fix it. Write down and sign the agreements that exist only on a handshake, and find the change-of-control clauses first, so the consents a sale needs are known before launch and not discovered at the table.
9. Earnings that are hard to call normal
A strong year, or a weak one, makes it difficult to say what the business earns in an ordinary year. A buyer prices the earnings it expects to continue, so a year it cannot explain becomes a year it discounts.
The fix
Frame it. Show what caused the year, whether the cause has passed, and what the months since show. Earnings below a recent peak can be explained, and priced fairly, when the founder can show what a normal year looks like and why.
10. A pending claim
A lawsuit, a dispute, or a regulatory matter that has not been resolved. A buyer cannot know what it will cost, so it asks for protection against it: a larger escrow, a broader indemnity, or a lower price.
The fix
Frame it. A claim takes as long as it takes, so disclose it early, with its facts, what has been done about it, and where your attorney says it stands. Never let a buyer discover it.
The ten red flags at a glance
| Red flag | What a buyer does with it | The fix |
|---|---|---|
| 1. Customer concentration | Lowers the multiple, or ties part of the price to the customer staying | Frame it: the contract, the relationship, the plan to diversify |
| 2. Owner dependency | A lower multiple, a larger earn-out, a longer transition | Frame it: show what has passed to the team |
| 3. Books on a cash basis, or never reviewed | Doubts every other number | Fix it: accrual books, reviewed statements |
| 4. Add-backs without documents | Takes them out of the earnings | Fix it: a record behind every add-back |
| 5. Personal expenses in the business | Separates them, and asks about the rest | Fix it: out before the trailing twelve months |
| 6. A license in the owner's name | Sees a gap in what it is buying | Fix it where you can: move it to the company |
| 7. Missing or non-assignable contracts | Asks for consents, or prices the risk | Fix it: sign them, find the change-of-control clauses |
| 8. Related-party arrangements | Adjusts them to market | Frame it: in writing, at market, one set of numbers |
| 9. Earnings that are hard to call normal | Discounts the year it cannot explain | Frame it: the cause, and what a normal year is |
| 10. A pending claim | Asks for protection: escrow, indemnity, price | Frame it: disclose early, with the facts |
In no order of importance: each flag is marked yellow or red on its own, by what it would do to price or certainty in the business it is found in.
Which issues should you fix before a sale, and which should you frame?
Fix what can be fixed before a sale, such as cash-basis books, undocumented add-backs, and missing contracts, and frame what cannot, such as customer concentration, a down year, or a pending claim. Books can move to an accrual basis. Add-backs can be documented. Contracts can be written down and signed. A license can sometimes be moved. These are the fixes, and they come first, because each one removes a flag entirely.
Every flag is sorted on two questions. How much would it affect price or deal certainty? And how easily can it be fixed before going to market? The playbook's diligence flag triage puts the answers on one grid:
- High impact, easy to fix: fix it now. Cash-basis books, a license in the owner's name, undocumented add-backs, missing contracts. Fix these before launch. They are the highest return on effort in the whole process.
- High impact, hard to fix: frame it. Customer concentration, a down year, a pending claim. These cannot be fixed in time. Disclose them early, with context and a plan, and never let a buyer discover them.
- Low impact, easy to fix: tidy. Small housekeeping items. Fix them as a batch, early.
- Low impact, hard to fix: note and move on. Minor legacy issues. List them in the data room and do not spend time on them.
Knowing which is which is most of the value. A founder who spends months on a low-impact issue while a high-impact one goes unframed has done the work in the wrong order.
Framing is not spin. It is disclosure with context. The facts are the same. What changes is who presents them, when, and with what evidence. This works best when someone who thinks like the buyer's team does it, at arm's length from the business: a founder knows the business too well to see it the way a stranger will.
When should you tell a buyer about a problem?
Before offers: an issue disclosed then is priced while buyers compete, and the same issue discovered after exclusivity becomes a reason to revisit the price. The same issue costs different amounts depending on when a buyer learns about it.
Disclosed before offers, an issue is part of the business the buyers are bidding on. They price it, alongside everything else, while competing with each other. Discovered after exclusivity, the same issue arrives when the buyer has no competition and the founder has stopped talking to anyone else. It becomes a reason to revisit the price, and the founder's alternative is to start over.
Discovery also costs credibility. A buyer that finds one undisclosed issue starts looking for the next, and every remaining answer is read with more suspicion. Diligence slows, questions multiply, and the buyer's confidence in the earnings it underwrote falls.
Disclosure also has a form. A known issue belongs in the CIM or the data room, stated plainly with its context, and ready to be discussed in management meetings. Buried in an appendix, or mentioned only when asked, it reads as concealment even when nothing was hidden.
Diligence yourself before a buyer does.
What this list leaves out
These are the flags that come up again and again, not every flag a buyer can raise. A business with a regulator, a second country, or several entities raises flags of its own, and the list a buyer sends covers far more than these ten. Working through the information requests a buyer would make shows which documents exist, which need to be found, and which need to be created.
That is why the most valuable time to diligence a business is before any buyer does. Fix what can be fixed. Frame what cannot. Then go to market with nothing left for a buyer to discover that you have not already explained. The Go-To-Market Analysis starts there: a discovery meeting asked from a buyer's side of the table, looking for the yellow and red flags in your business.