Due Diligence Shortcuts That Experienced Acquirers Use

Due diligence is expensive. A full quality-of-earnings analysis, legal review, environmental assessment, and IT audit can easily cost $100K-$200K for a lower mid-market transaction. Spending that money on the right deal is an investment. Spending it on the wrong deal is a catastrophic waste.

The best acquirers have a rapid screening process — a set of quick, cheap checks that kill bad deals before the expensive diligence begins. Think of it as diligence triage.

The 48-Hour Screen

Before you spend a dollar on outside advisors, you should be able to answer these questions with a few hours of work:

1. Do the tax returns match the story? Request three years of tax returns early. If the owner claims $2M EBITDA but the tax returns show $800K in net income with no obvious add-backs, something does not add up. Tax returns are hard to fabricate.

2. Is revenue concentrated? Ask for a customer list by revenue. If one customer represents more than 20% of revenue, that is a significant risk factor. If the top five customers represent more than 50%, you are buying a relationship, not a business.

3. Is the owner the business? Ask what happens if the owner takes a 3-month vacation. If the answer is "the business stops," you are not buying a business — you are buying a job. And the price should reflect that.

4. What does the employee tenure look like? A business where the average employee has been there 8 years is different from one where average tenure is 18 months. High turnover usually means either poor management, below-market compensation, or a declining business.

5. Is there deferred maintenance? Visit the facility. Look at the equipment. If everything looks tired, factor $200K-$500K in catch-up capital expenditure into your valuation.

The Desktop Diligence Package

Before a site visit, compile this information:

• Secretary of State filings — Verify entity structure, good standing, registered agent
• Litigation search — Check state and federal court records for pending or historical lawsuits
• Lien search — UCC filings, tax liens, judgment liens
• Property records — If the business owns real estate, verify ownership, liens, and assessed value
• Online reputation — Google reviews, BBB complaints, Glassdoor reviews (employee sentiment)
• Competitor landscape — Who else operates in their market? What is their relative position?
• Industry benchmarking — How do their margins, growth rate, and revenue per employee compare to industry norms?

This package costs essentially nothing and takes a few hours to compile. It kills 20-30% of deals that look good on paper but have hidden problems.

Red Flags That Kill Deals Fast

• Owner will not provide tax returns or delays repeatedly
• Significant gap between claimed revenue and verifiable indicators (employee count, facility size, web presence)
• Pending or recent litigation involving customers, employees, or regulators
• Recent loss of a major customer that has not yet hit the financials
• Key employee departures in the last 6-12 months
• Owner's spouse or family members are in key operational roles with no clear successor plan
• The business relies on a license or certification held personally by the owner

The Value of Saying No Quickly

The most profitable skill in deal-making is not finding good deals. It is killing bad deals fast. Every hour spent evaluating a company you will not buy is an hour you could have spent on one you will. The firms with the best returns are not the ones that close the most deals. They are the ones that evaluate the most deals and close only the best ones.

Ted helps here too — by pre-screening and scoring targets before they reach your deal team, Ted filters out companies that would fail the 48-hour screen, saving your team time and diligence cost.