Glossary
Due Diligence Before Buying a Business: 6 Things First-Time Buyers Miss
Due diligence on a first acquisition is where the price you agreed to meets the business you are actually buying. A letter of intent sets terms you will spend months trying to defend, and first-time buyers tend to miss the same six things on the financial side. Treat this as the short due diligence checklist that sits underneath the formal one, because each item here can move the number after the LOI is already signed. Knowing them early is the difference between negotiating from evidence and negotiating from surprise.
The financial due diligence checklist, in short:
– Confirm whether the earnings are EBITDA or really SDE
– Pressure-test the working capital you will need on day one
– Reprice rent and insurance at what you will actually pay
– Break revenue down to expose customer concentration
– Match the diligence format (data book vs report) to the deal
– Know what a QoE does not cover (valuation, tax)
Each is unpacked below.
- The EBITDA you are buying may really be SDE
On an owner-operated business, the earnings presented often assume no one needs to do the owner’s job. Until you price the cost of replacing that work, you are looking at seller’s discretionary earnings, not EBITDA. The gap can be large on a hands-on business.
- Working capital you will need on day one
Sellers underestimate how much working capital a business requires. If the net working capital peg is set too low, you are injecting cash the week you take over. Settle the working-capital basis before the LOI locks the price.
- Rent and insurance will reprice for you
The seller’s historical rent and insurance are rarely what you will pay. Leases renew higher and group insurance reprices standalone. Build those costs at the level you will actually carry, not the level the seller enjoyed.
- Customer concentration behind a healthy total
A revenue number that looks strong can rest on one customer at twenty to forty percent or more, or on a one-time project that will not repeat. Concentration changes the risk of the entire deal. Break revenue down by customer before you commit.
- You may be overpaying for the diligence format, not the diligence
For most deals under roughly ten million dollars, an Excel data book delivers the same diligence as a long report, and lenders accept it. A fifty-page report is built for larger or more complex deals. Match the deliverable to the deal so cost tracks value.
- A QoE is not a valuation, and not tax diligence
A Quality of Earnings report tells you whether the earnings are real. It does not tell you what the business is worth, and it does not cover tax exposure. Those are separate workstreams. Knowing what each does keeps you from assuming a gap is covered when it is not.
Frequently asked questions
Should I get a QoE before or after the LOI?
Many buyers move to an LOI first, then run diligence. The earlier you understand the earnings and working-capital picture, the less you are renegotiating from surprise during exclusivity.
What is the difference between EBITDA and SDE?
On an owner-operated business, presented EBITDA often includes the value of the owner’s own work. SDE makes that explicit. The real, replaceable cost of running the business sits between them.
Do I need the full report or the data book?
For most deals under about ten million dollars, the data book carries the same diligence and is lender-compatible. The full report is for larger, private-equity, or complex-capital-structure deals.
Where to next
Start with the Quality of Earnings due diligence guide for the full picture, or read what a Quality of Earnings report actually finds. To sanity-check a deal before you sign, reach our transaction advisory team.
