Due Diligence When Buying a Business: What Smart Buyers Always Check (But Most Don’t)

If you're buying a business, whether it's your first or your fifth, you probably already know to ask for the P&L, the tax returns, and the lease agreement. Due diligence and the red flags when buying a business. But here's the harsh truth:

Most bad deals don’t go bad after settlement. They go bad during due diligence, because the buyer wasn’t paying close enough attention.

The financials may look fine. The seller may seem trustworthy. But hidden in the notes, the trends, and even the things not said, that’s where the real story lives.

This post will walk you through:

• The 5 questions that protect your capital
• Red flags most buyers miss
• How sellers inflate their profit with “normalisation games”
• What reports and data to request
• Key ratios that reveal the real performance
• A case study where smart due diligence saved a buyer $565,000

By the end of this guide, you’ll know exactly how to approach due diligence like a professional buyer, not a hopeful one.

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The Mindset Shift: From Auditor to Interpreter

Due diligence isn’t just about confirming facts. It’s about testing the seller’s narrative.

It’s not just data. It’s insight.
Not just “tick the box.” It’s “read between the lines.”

Smart business buyers act like interpreters, asking, “What does this really mean?” when they see a neat P&L or a cheerful explanation.

Here’s the golden rule I teach in every strategy call:

If it’s not in writing, it doesn’t exist. And if it sounds off, it probably is.

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The 5 Core Questions Every Business Buyer Must Ask

These questions form your filter. Use them for every deal, whether it’s a $200K bolt-on or a $5M acquisition.

1. Is the Revenue Real and Repeatable?

• Is it diversified across customers and channels?
• Are there any revenue spikes timed suspiciously around tax periods?
• Is customer churn being hidden behind “top-line growth”?

2. Are the Expenses Understated or Manipulated?

• Have costs mysteriously dropped pre-sale?
• Are staff, rent, marketing, or even maintenance “normalised” out?

3. Is There Hidden Debt or Deferred Liability?

• Look for unpaid super, ATO debt, leave accruals, or lease obligations not in the financials.

4. What Role Does the Owner Play in Value Creation?

• Are they the rainmaker? The glue? If they leave, does the business unravel?

5. What’s NOT Being Shown?

• What documents are missing?
• What answers feel overly rehearsed?
• Where’s the resistance when you push?

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Red Flags in Financial Statements

Polished numbers are not always profitable ones. Here are red flags to watch for:

1. Declining Gross Margins Hidden by Revenue Growth

The business might show sales growth, but if margins are slipping, it’s not scaling, it’s bleeding.

2. Adjusted EBITDA Hiding Essential Costs

Ask: Adjusted for what? If they remove recurring costs like software, admin, or marketing, that’s not “normalisation”, it’s fiction.

3. Sudden Expense Drops Pre-Sale

This is window dressing. Sellers often cut spend to make the P&L look better. But those costs return after you take over.

4. Missing or Low Owner’s Salary

If they’re not paying themselves properly, you’ll have to. Add that cost back in before trusting the numbers.

5. Personal Perks in the Business

Cars, travel, family phone plans… If they’re “add-backs,” ensure they’re documented and defensible.

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Operational Red Flags Most Buyers Ignore

Even clean books can hide a business held together by duct tape. Operational issues that scare me include:

• No documented SOPs or systems
• Owner still running sales or ops
• Key staff uncontracted or planning to leave
• Bloated or unreliable CRM and customer data
• Customer loyalty based on personality, not systems

Remember: If it needs the owner to function, it’s not a business; it’s a job.

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🧾 The Due Diligence Document Checklist

Here’s what I expect every seller to hand over; or I walk:

• 3 years of monthly P&L and Balance Sheets
• Aged Receivables and Payables reports
• Full breakdown of ad-backs (with explanations)
• All staff contracts + award rate compliance
• Lease agreements, IP register, insurance policies
• Top 10 customers with revenue concentration
• Bank statements (last 6-12 months)

If any of these are “in progress,” pause. If they refuse? There’s your answer.

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📉 Normalisation Tricks: When “Profit” Is a Fantasy

Sellers love to “normalise” expenses to boost EBITDA. Some are legit. Many are not.

Watch out for:

• “One-off” expenses that occur every year
• Add-backs for essential costs (like tech tools or admin)
• Revenue timing games (pushing or pulling revenue)
• Off-book liabilities (leases, loans)
• Unpaid tax or superannuation

If the seller is removing half their P&L from the valuation, you should be doubling your scrutiny.

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📊 Ratios & Metrics That Reveal the Truth

Crunch these simple numbers to uncover the real story:

• Revenue per employee - too high = unsustainable, too low = bloated team
• Gross margin trend vs. industry benchmark
• Monthly EBITDA trends (spikes = manipulation)
• Customer retention or cohort churn
• Cash flow vs. profit reconciliation

These aren’t just numbers - they’re truth detectors.

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🎤 The 5 Seller Questions That Reveal Everything

Numbers can lie. Conversations can’t, if you ask the right questions.

Ask:

• What worries you most right now?
• Who are the 3 people keeping this running?
• If I removed you for 4 weeks, what breaks?
• What would you fix if you stayed another year?
• If you were buying this business, what would worry you?

Watch their body language. Look for hesitation. Honesty comes when the script disappears.

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Real Case Study: How Due Diligence Saved a Buyer $565K

One of my clients was looking at a tidy e-commerce business showing $420K EBITDA with a 3.2x multiple (asking price: $1.34M).

But we dug in:

• Owner’s spouse and daughter were working unpaid - adding $80K in hidden costs
• Quarterly sale “one-off” repeated each year - inflated short-term revenue
• Warehouse lease obligation off the books

After true adjustments, real EBITDA = $310K
Final deal = $775K

Due diligence didn’t kill the deal. It saved it.

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The Golden Rule of Due Diligence

Let me leave you with the most important principle of all:

Assumption is the enemy of smart buying.

If you’re assuming the seller is being transparent, you’re taking a gamble.
If you’re trusting vague answers without evidence, you’re exposing your capital.

Interrogate. Don’t assume. Document. Don’t guess.

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Want to Go Deeper? Get the Tools:

📥 Download my Due Diligence Checklist
The exact one I use with private clients - documents to request, ratios to calculate, and the 20+ seller questions that change the game.
→ Download Now

🎯 Book a Free 30-Min Investor Strategy Call
Bring your deal. I’ll help you gut check it, interpret the story behind the numbers, and walk you through your next move.
→ Book Now

🎙️ Watch the Full Webinar: Due Diligence Deep Dive
Catch the replay of this Built to Buy session and hear the full breakdown, including case studies and audience Q&A.
→ Watch on YouTube