# The Boring Business Buyer's Due-Diligence Checklist

> A practical, line-by-line list of what to request, verify, and walk away from before you buy a small business — built for seller-financed, SOWS-style acquisitions.

Use it deal by deal. Print it, or copy it into your notes and check each item off
as you verify it. The goal is simple: never be surprised after closing.

## 1. Financials to request (and actually read)

Never trust a listing's stated 'cash flow.' Ask for the documents below, then rebuild SDE yourself. If a seller won't produce these, that is itself the answer.

- [ ] Three full years of federal business tax returns (plus the current year-to-date).
- [ ] Three years of profit & loss statements AND balance sheets — monthly, not just annual.
- [ ] Bank statements for the last 12–24 months, to reconcile against the P&L (deposits should match reported revenue).
- [ ] Merchant-processor / point-of-sale statements to independently confirm card revenue.
- [ ] The seller's SDE (Seller's Discretionary Earnings) calculation, with every add-back itemized.
- [ ] A/R and A/P aging reports — how much is owed to the business, and how much it owes.
- [ ] Sales-tax filings and payroll-tax filings (confirm they're current; back taxes transfer in an asset-light deal more often than buyers expect).
- [ ] A list of all recurring/subscription revenue vs. one-time revenue.

## 2. Scrutinize the add-backs (this is where price is made or lost)

Add-backs inflate SDE, and SDE × multiple is the price. Every dollar of bogus add-back you accept is paid for at the full multiple. Challenge each one.

- [ ] Owner's salary and payroll taxes — legitimate add-back ONLY up to what a replacement manager would cost; the excess is not.
- [ ] One-time / non-recurring expenses — verify they were truly one-time (a 'one-time' repair that recurs every two years isn't).
- [ ] Personal expenses run through the business (vehicles, travel, meals, phones) — legitimate, but get receipts; don't take a round number.
- [ ] Owner family members on payroll who don't work there — add back their cost, but confirm the work they did actually gets done.
- [ ] Interest and depreciation — standard SDE add-backs; make sure they aren't double-counted.
- [ ] Reject add-backs you can't document. A clean SDE you can defend beats a high SDE you can't.

## 3. Customer concentration & revenue quality

A business that looks healthy can collapse the week after closing if one customer leaves. Map the revenue before you map the offer.

- [ ] Revenue by customer for the last 2–3 years — what % comes from the top 1, 5, and 10 customers?
- [ ] Red flag: any single customer > 10–15% of revenue, or top 5 > 40%. Concentration should lower your price and raise your seller-note.
- [ ] Are top customers under written contract, or month-to-month / handshake? Will those contracts survive a change of ownership (assignment clauses)?
- [ ] Customer tenure and churn — are they long-standing, or recently won (and as easily lost)?
- [ ] How much revenue depends personally on the seller's relationships? Boring-business gold is revenue that runs on systems, not on the owner's golf buddies.
- [ ] Online reputation: Google/Yelp/industry reviews, BBB complaints, and trend over time.

## 4. Operational due diligence

SOWS rewards Stale, Old, Weak, Simple — but 'simple to improve' is different from 'broken and undocumented.' Confirm the business can run without the seller in the room.

- [ ] Owner dependence: how many hours/week does the seller work, and doing what exactly? Could a manager do it?
- [ ] Documented systems / SOPs — or is everything in the owner's head? Undocumented = retraining risk and a longer transition.
- [ ] Key-employee risk: who is essential, are they staying, and are they tied down (or a flight risk who could start a competitor)?
- [ ] Supplier concentration and terms — single-source suppliers, exclusivity, or volume pricing that won't transfer to you.
- [ ] Equipment & assets: age, condition, deferred maintenance, and what's leased vs. owned. Walk the floor; don't trust the asset list.
- [ ] Software, logins, domains, social accounts, phone numbers — get a written inventory and a plan to transfer every one at closing.
- [ ] Seasonality and the trailing-12-month trend: is revenue flat, growing, or quietly declining? A declining business is a different deal at a different price.

## 5. Legal, lease & liabilities

Boring businesses hide boring liabilities. Find them before they're yours.

- [ ] Structure the deal as an asset purchase (not stock) where possible, so you don't inherit unknown liabilities — confirm with a deal attorney.
- [ ] The lease: remaining term, rent escalations, assignment/transfer rights, and whether the landlord will consent. A great business with 6 months left on a lease is a problem.
- [ ] Pending or threatened litigation, liens (UCC filings), and judgments against the business or owner.
- [ ] Licenses, permits, and certifications — are they transferable, current, and held by the business (not personally by the seller)?
- [ ] Employee classification (W-2 vs. 1099) and any wage-and-hour exposure — misclassification is a common hidden liability.
- [ ] Insurance history and claims — gaps or a heavy claims record signal operational risk.
- [ ] Non-compete from the seller in writing — geographic scope, duration, and that it actually has teeth in your state.
- [ ] Outstanding warranties, gift cards, deposits, or prepaid contracts you'd be obligated to honor.

## 6. Seller-financing red flags

A seller who won't finance any of the deal is telling you something about their confidence in the business. Use the seller note as both a financing tool and a diligence tool.

- [ ] A flat refusal to carry ANY seller note is a yellow-to-red flag — why won't they bet on their own numbers?
- [ ] Push for a seller note of 30–60% of price; the more the seller carries, the more aligned they are with the business performing after closing.
- [ ] Tie part of the note to an earn-out or performance hold-back when customer concentration or owner-dependence is high.
- [ ] Watch for a seller insisting on all-cash AND a high multiple — that combination often means they want out before something breaks.
- [ ] Confirm there's no senior lender lien that would subordinate or block a seller note (check UCC filings).
- [ ] Get a real transition/training period in writing (typically 30–90 days, longer for relationship-driven businesses).
- [ ] Beware seller 'add-back' stories that only exist verbally — if it's not on a tax return, it's not in your SDE.

## 7. Valuation sanity checks

Price is SDE × multiple. Get both right, and pressure-test the result three different ways before you sign anything.

- [ ] Rebuild SDE yourself from the tax returns — don't accept the broker's number.
- [ ] Apply a realistic INDUSTRY multiple range (most small boring businesses trade ~2–4× SDE; higher for recurring-revenue or low-owner-dependence).
- [ ] Adjust the multiple DOWN for: customer concentration, owner dependence, declining revenue, short lease, single-supplier risk.
- [ ] Adjust UP for: recurring revenue, documented systems, diversified customers, a manager already in place.
- [ ] Cross-check with a payback test: at the suggested price and SDE, how many years to recoup your cash? 3–5 years is typical; much longer needs a reason.
- [ ] Run the debt-service test: after the seller note and any SBA loan payment, does the business still throw off cash for YOU to live on? If the DSCR is under ~1.25–1.5, the deal is too tight.
- [ ] Sanity-check against asking price: if the multiple implied by the ask is well above the industry range, you need a documented reason or a lower offer.
- [ ] Always leave working-capital headroom — buying a business with no cash buffer is how good businesses die in month two.

## 8. Hard walk-away triggers

Discipline is an edge. Any one of these, unresolved, is reason enough to walk — there is always another deal.

- [ ] Seller won't produce tax returns, or the returns don't reconcile with the P&L and bank statements.
- [ ] Revenue is materially concentrated in one customer who is month-to-month or leaving.
- [ ] The business cannot run without the seller, and the seller won't commit to financing or a real transition.
- [ ] Undisclosed liabilities, back taxes, or active litigation surface during diligence.
- [ ] The lease can't be assigned, or is about to expire with no renewal.
- [ ] The numbers only 'work' if you accept undocumented add-backs.

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Educational use only — not financial, investment, tax, legal, or business-
valuation advice. Always do your own due diligence and consult licensed
professionals before making an offer or purchasing a business.

Run a specific deal through the AI Deal Analyzer at https://bizdealiq.com/analyzer