Before we dive in, a quick note:

I have a business called SMB Business Plans that I run with my partner Joe Thomas. We help write business plans for business buyers looking to take out SBA Loans to fund their acquisitions. We know exactly what SBA lenders look for in a business plan, so we can write up a plan that will check all the boxes. Check it out here.

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It's been an amazing year for Pioneer Capital Advisory so far. We've already funded 50% more acquisitions than we did in 2023, and we've still got most of Q4 to go. Excited to finish out the year strong and set a new high water mark. Thank you for everyone who's followed along and been part of the journey so far. Here's our number of funded deals by year:

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Today, I want to cover some specific red flags that I am seeing on deals lately. And I'm going to tell you what business buyers should be doing, in my opinion, when they see these red flags. It's important to note that one red flag by itself isn't necessarily a deal killer, but a couple of them piling up probably is.

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As always, you'll have to judge the situation based on your personal preference for risk. Let's take a look at some red flags:

• Red Flag 1: The sell-side business broker wants to facilitate all of the communication with the seller of the deal and doesn’t want the buyer communicating directly with the seller once the deal has gone under LOI. This is just inefficient and awkward, and probably won't result in a successful deal. If I encountered this, I'd politely counter and say it's fine that the broker run point on communication, but I'd still need the seller involved at least somewhat. If they refuse, I'd have to wonder: What are they trying to hide?
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  The problem with agreeing to this type of demand is that you'd be negotiating solely with someone who,. at the of the day, doesn't actually have the authority to close the deal.
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• Red Flag 2: Many personal expenses that have nothing to do with the operations of the business being purchased are being run through business financials. The specific reason that this is a red flag is that you as the business buyer need to question if the seller is an honest person if they are potentially committing tax evasion by writing off personal expenses as business expenses.
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  If something doesn’t look right, it probably isn’t right. Of course, items like a family cell phone plan, which may be partially for business, are probably fine; but more than a couple of these and I'd be questioning the honesty of the seller.
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• Red Flag 3: The seller is not using an M&A attorney to represent them in the business sale, and is using a generalist attorney instead. If the seller is relying on a generalist attorney rather than an M&A expert, it could signal that the seller doesn’t fully appreciate the complexities of the sale.
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  M&A attorneys are experienced in addressing the specific legal hurdles that can arise in a transaction—ranging from deal structuring to tax implications and even transition agreements. Without this specialized expertise, key issues may be overlooked, such as poorly drafted non-compete agreements, inadequate representations and warranties, or missing clauses that ensure a smooth post-sale transition.
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  In short, an inexperienced attorney could not only slow down the deal but also leave room for post-sale litigation or disputes. If the seller isn’t investing in proper legal counsel, it might be a signal that they’re cutting corners elsewhere, too.
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• Red Flag 4: The seller is not being transparent about how connected they are directly to relationships with key accounts – which is critical when there is customer concentration in a business.
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  As a business buyer, it is absolutely mission-critical to know who is responsible for revenue generation within a business. If the seller is the one who is ultimately responsible for maintaining a key customer relationship, there is a good chance that after the sale, you as the buyer will lose that relationship (even if there is a non-compete agreement in place).
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• Red Flag 5: The seller is disorganized in initial due diligence requests for simple items post-LOI. For example, obtaining current financials (income statements and balance sheets) feels like it takes an “Act of God” and/or you find yourself asking for the same things repeatedly. This could either signal deception (they are trying to hide bad news from you), or disorganization. Either one doesn't bode well for you buying their business.
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• Red Flag 6: Family businesses with zero non-family employees. These businesses are family businesses for a specific reason – the family works very well together. If you insert the new variable of an external buyer that isn’t part of the family, it is very unknown how things will go from a transitional standpoint.
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  The family members may have developed their own unique way of managing the business, which may not be easily transferable to someone outside the family.
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• Red Flag 7: The seller is unwilling to provide a seller’s note (of any amount). If you think about things logically, a seller providing a seller’s note shows that they think their business is transitional to a new buyer. They are willing to have monetary skin in the game or chips on the table following the sale. If the seller is expecting to be entirely paid out at closing, you as a business buyer have no leverage to ensure that the seller fulfills the transition of the business
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• Red Flag 8: High employee turnover. One thing that you as a business buyer really want to do a deep dive on when you are purchasing a small to medium sized business is determining how long the team members have been with the company.
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  Let's say you request the seller to provide you with an organizational chart to determine who the employees are within the business and who does what, and then you start asking questions about tenure and longevity of the current employees. If you discover that there is lots of employee churn, there may be a cultural issue within the business itself that could take a long time to remedy.

Conclusion Buying a business is a complex process that requires careful attention to detail. Recognizing these red flags early on can help you avoid costly mistakes and ensure that you’re making an informed decision. As always, trust your gut—if something feels off, it’s worth investigating further. Conduct thorough due diligence, ask tough questions, and don’t be afraid to walk away from a deal if too many red flags appear.

Thanks for reading!

Last Note I will be speaking at the Chicago Booth Kellogg ETA conference on Monday, November 4th and that tickets are still on sale. Get Tickets Here.​

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Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading! Feel free to reply directly to this email with any questions or thoughts.