Why Diligence Is Where Deals Are Won or Lost
The acquisition price you pay on day one is fixed. The quality of the business you walk into on day one is not — it's determined entirely by the depth of your diligence before close. Searchers who move too fast through diligence are the ones who discover customer concentration, undisclosed liabilities, and key-person dependencies after they've wired the purchase price.
This checklist reflects what we verify on every deal we co-invest in. Some of these items are table stakes. Some are the ones first-time searchers miss.
Financial Diligence
Start with three years of tax returns, not just management financials. Tax returns reveal the real business, not the version the broker prepared for the process. Reconcile the difference between tax income and adjusted EBITDA — every add-back needs documentation and defensibility.
Build a full financial model: historical income statement, balance sheet, and cash flow with three scenarios (base, upside, downside). Stress test the downside for a 20% revenue decline in year one — which is realistic in any management transition. The business needs to survive that scenario and still service SBA debt.
Run SQL analysis on the customer revenue file if the seller provides it (and require them to). Look for revenue concentration, customer tenure, churn trends, and pricing trends. This is where we catch businesses that look stable on the surface but have been losing their top customers for three years.
Quality of Earnings
A quality of earnings (QofE) analysis from an independent accounting firm is essential for any deal above $1M in purchase price. The QofE normalizes the financials, validates add-backs, confirms revenue recognition, and identifies working capital trends.
Sellers sometimes resist QofE requests. Resistance is itself a data point. Reputable sellers of quality businesses welcome QofE — it validates their asking price and accelerates the buyer's confidence.
Customer Diligence
Talk to the top 10 customers before you sign. This is non-negotiable. Ask them what they would do if the current owner left. Ask them what they would change about the business. Ask them about their own five-year plans. A customer who mentions they're retiring, consolidating vendors, or has already started evaluating alternatives is a risk the income statement won't show you.
Operational Assessment
Walk through the business operations before LOI if possible. Understand the production process, the key roles, and where the owner is personally involved in delivery. Businesses where the owner is the primary relationship for the top 30% of revenue are higher risk — not disqualifying, but higher risk with specific mitigation requirements.
Assess the tech stack. Manual billing, spreadsheet-based operations, and no CRM are opportunities for improvement — but they're also indicators of how much operational work is ahead of you.
Legal Review
Review all material contracts: customer contracts, vendor agreements, leases, employment agreements, and any IP licensing. Confirm ownership of the business's key assets — domain names, trademarks, proprietary systems. Check for pending litigation or regulatory issues in the relevant Secretary of State and UCC databases.
What Mayfaire Row Adds to Diligence
We run financial modeling and SQL analytics in-house and go deeper than a standard spreadsheet review. We have modeled and stress-tested billions in M&A and capital markets transactions — and we apply that institutional rigor to every deal we evaluate at the sub-$5M scale. We tell searchers what we see. If something is a red flag, we say so early.
The Pre-LOI Checklist (Minimum)
Before signing an LOI: trailing three-year tax returns reviewed, initial EBITDA build validated, customer concentration identified, seller's transition availability confirmed, SBA lender pre-engaged, and equity investor conversations initiated. The LOI is not the finish line — it's the starting gun on the real work.