Red flags in a small-business deal

This is educational. A red flag is a question, not a reason to accuse someone, and not legal or accounting advice.

The numbers do not match

Tax returns and internal statements that tell different stories. Add-backs with no receipt. A one-time expense that shows up every year. Owner pay that is not on a payroll record. IRS Publication 334 is a starting point for what a small business reports. It is not the seller's return.

One customer, or the owner, is the business

A customer large enough that their leaving changes the company. Contracts that are oral. The owner is the estimator, the salesperson, and the person the landlord calls. Ask who runs a week. If the answer is a name you have not met, ask to meet them before the letter of intent, under the NDA.

The premises and the license

Rent to a relative, above or below what a stranger would pay, with no appraisal. A lease that cannot be assigned, or that ends before you would earn the price back. A license, a permit, or a carrier authority in the owner's personal name. A buyer cannot close what the landlord or the agency will not transfer.

The price

A multiple with no earnings bridge. Real estate mixed into the business price so the multiple looks normal. Working capital left undefined, so the peg becomes a fight at the end. Seller financing described in a sentence and not in a note. An earnout that the SBA lender may not allow. The current SOP 50 10 is what the lender applies. A 2023 procedural notice said seller earnouts were prohibited on 7(a) change-of-ownership loans. Do not assume the notice you remember is the rule on the day you apply.

The process

A seller who will not let your accountant see the bank statements. A broker who will not say how they are paid. A request that you waive diligence to "keep the deal moving." Speed is not a term. Your lawyer and your CPA are the people who tell you which of these flags are fatal. This list does not.