Buying a Business Without Losing Your Shirt

How to spot red flags before you sign the LOI

You’ve found a business that looks promising. Numbers check out. The seller seems legit. There’s a whisper of potential in the air. But before you hit “sign” on that Letter of Intent, you’d better be sure you’re not buying a time bomb in khakis.

We’ve bought and sold enough companies to know: deals that blow up rarely look like bad ideas at first glance. It’s the stuff beneath the surface that sinks you.

Here’s how to spot trouble before you commit.

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1. Messy Financials = Messy Everything

If the books are chaotic, the business probably is too. That doesn’t mean it can’t be a good buy — but it means you’re inheriting a mess, not a machine.

What to watch for:

• Missing or inconsistent P&Ls
• Excessive “owner add-backs” that feel… creative
• No clear understanding of customer margins

Quick gut check: If you can’t understand the business model from the financials, run — or renegotiate.

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2. The One-Person Empire

If the owner is still the bottleneck, the brand, the top salesperson, and the head of HR — you’re not buying a business. You’re buying a job.

Red flags:

• Owner takes every sales call
• No written processes or SOPs
• Key relationships are personal, not institutional

You don’t want to walk in on Monday and realize you need to become this person just to keep revenue from collapsing.

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3. Customer Concentration Cliffs

One client makes up 60% of revenue? That’s not a portfolio — it’s a liability.

Ask:

• What happens if that one customer leaves?
• Is there a written contract — or a handshake deal?
• Has the seller proactively tried to diversify?

The bigger the risk, the steeper your discount should be.

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4. Staff Who Are “Totally Loyal” to the Owner

Translation: they’re probably leaving the minute he does.

People don’t always stay for the business — they stay for who they work for. And that person is about to cash out.

Look for:

• Longevity without leadership depth
• No formal org chart
• Zero incentive plan for the team post-close

You’ll need a retention strategy on day one — or a deep hiring bench.

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5. Sketchy Legal or Tax History

You’d be surprised how often this one comes up. Or maybe you wouldn’t.

What to check:

• Payroll tax filings
• Lawsuits (past and pending)
• Licensing and compliance in all operating states
• Ownership cap table and partner agreements

LOIs don’t bind you to buy — but they do kick off a clock. You don’t want to be chasing skeletons during due diligence.

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6. The Seller Is Way Too Eager

A motivated seller is fine. A desperate one isn’t.

If they push you to sign fast, gloss over details, or try to “pitch” instead of answer, step back. Something’s wrong. Either with the business — or with their expectations.

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Final Thought: Trust Your Gut. Then Trust the Data.

The LOI is where emotions can get loud. You’re excited. They’re hopeful. Brokers are smiling. Everyone wants to keep the momentum.

Pause anyway.

Run the deal through a seasoned operator’s lens. Better yet — bring someone who’s done this before into the room with you. We’ve seen plenty of good businesses go bad because the buyer missed what mattered most.