A quick note:

Make sure to check out my business SMB Business Plans if you're in need of a business plan for your SMB acquisition. We know how to write these business plans in the exact style that SBA lenders are looking for.

Also, check out Pioneer Tribe Insurance if you need insurance around your business acquisition.

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Conducting Due Diligence on the Seller (Before Submitting an LOI)

When buying a small to medium-sized business, you’re not just acquiring physical assets, employees, or operations.

You’re also inheriting the goodwill of the seller.

This intangible asset can make or break your investment. Unfortunately, I’ve seen firsthand what happens when buyers overlook this crucial aspect of due diligence.

One disaster stands out vividly.

A client purchased a commercial cleaning business that was having some trouble. My client liked the business and thought many of the issues could be fixed.

This is what many business buyers do - they're buying the business because they believe that they can build off what the previous owner has done. Update systems, automate, and scale the business.

But then my client discovered the awful truth: The seller was the reason the business was in a downward spiral.

The seller’s poor relationships with clients and inability to generate new business had driven the company into decline. My client didn’t just inherit a business; they inherited its tarnished reputation, which required extensive time and effort to rebuild.

Another example involved a due diligence process that revealed the seller had a history of threatening behavior. Specifically, the seller had once threatened a government official on his front porch with a shotgun.

I advised the buyer to seriously reconsider the deal, especially given how much the seller’s involvement was needed post-closing.

Is this really the type of person they wanted to rely on post-closing if they had any questions about the business? What if something goes wrong during the transition?

This situation underscores a key point: sometimes the seller’s character is just as important as the business itself.

When buying an SMB, you are relying heavily on the seller to represent information.

Sure, you can double check some of their info and do your own research.

But the business owner has an information advantage over the buyer. They've worked in the business for years, and you only get to spend a few weeks researching it before buying.

While you should always 'trust but verify', it's critical that you work with someone trustworthy in the first place.

Here’s another case:

I’ve been working with a prospective client on various deals, and on one particular opportunity, the seller had a former felony tied to a violation with a federal financial regulatory authority. I advised my client to walk away.

Buying a business from someone with a history of dishonesty can have significant long-term repercussions.

These cases highlight a simple but essential truth: as a business buyer, the most important thing is to buy a good business from a good person.

If the seller’s character is questionable, the deal’s fundamentals are undermined.

No amount of financial performance, market potential, or industry opportunity can make up for a seller whose actions may poison the business you’ve just acquired.

So, how do you protect yourself?

Conduct Thorough Background Checks: Use public records, legal databases, and professional reference checks to understand the seller’s reputation and behavior. Most states allow you to perform court record searches and/or UCC lien searches on individuals for free (even if there’s a cost, it’s often nominal). These searches can reveal lawsuits, judgments, liens, or other red flags tied to the seller.

Ask the Hard Questions: Directly address the seller’s involvement in the business and their relationships with clients, vendors, and employees.

Look for Red Flags on Social Media: In less than 10 minutes, you can often search social media to uncover anything “weird” or concerning about the seller’s character. Whether it’s inappropriate posts, confrontational behavior, or indications of dishonesty, these insights can give you an edge in assessing the person behind the business.

In the end, buying a business is about mitigating risk.

By taking the time to vet the seller just as thoroughly as the business itself, you can ensure you’re setting yourself up for success—not inheriting someone else’s problems.

As always, I’m here to help you navigate these complex decisions. Let’s work together to make sure your next acquisition is built on a strong foundation of trust, integrity, and opportunity.

Take care,

Matthias

📩 Email me at matthias@pioneercap.com 🌐 Visit us at pioneercapitaladvisory.com​

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.

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