Red flag library
40 red flags.
Financials
10 red flags
Declining revenue or profit
Falling sales or profit mean the business you take over is likely to earn less than its history suggests. Listings often price in the better years.
Severity: price it inAll business modelsLarge or undocumented add-backs
Add-backs raise the earnings a price is based on. When they are large, vague or unsupported, much of the asking price rests on claims rather than records.
Severity: price it inAll business modelsTax returns that do not match the accounts
When the profit in the tax returns cannot be reconciled to the profit in the accounts, you cannot tell which figures to trust, and there may be tax owed.
Severity: deal breakerAll business modelsUnrecorded cash sales
A seller who says the business takes more cash than the books show is asking you to pay for income nobody can verify, and may be passing on a tax problem.
Severity: price it inRetail, Hospitality, Agency or services, Construction, Healthcare, OtherOne-off revenue inside the last 12 months
A contract, windfall or spike that will not repeat can sit inside the last 12 months and be priced as if it will. Take it out before you value the business.
Severity: price it inAll business modelsMargins far above industry norms
Profit margins well above similar businesses can reflect a real advantage, but more often costs are missing, have been moved elsewhere or have not been paid yet.
Severity: price it inAll business modelsAgeing or written-down stock
Stock that has sat unsold is often worth less than its recorded cost. If you pay cost for it you overpay, and past profit may have been overstated.
Severity: price it inEcommerce, Retail, Distribution, ManufacturingPayables stretched ahead of a sale
Paying suppliers late before a sale builds up cash the seller can take out and leaves you to pay the bills. A working capital adjustment usually fixes it.
Severity: fixableAll business modelsRelated-party transactions
Deals between the business and its owner, their family or their other companies may not be at market rates, and many will not survive the sale.
Severity: price it inAll business modelsDeferred maintenance or capital spend
An owner who stops repairing and replacing equipment before a sale makes profit look higher and leaves you with the catch-up bill.
Severity: price it inManufacturing, Logistics, Hospitality, Construction, Healthcare, Retail, Distribution, Other
Customers and revenue
6 red flags
One customer above 20% of revenue
When one customer brings in more than a fifth of revenue, much of the value you are buying depends on a relationship you do not yet control.
Severity: price it inAll business modelsContracts that end on a change of control
Some customer, supplier and licence contracts let the other side walk away or renegotiate when the business is sold. Find them early and make consent part of the deal.
Severity: fixableAll business modelsRising churn, refunds or chargebacks
Customers leaving faster, asking for their money back or disputing payments are early signs that revenue will shrink, often before the headline numbers show it.
Severity: price it inSaaS, Ecommerce, Content, App, Marketplace, Agency or servicesHeavy discounting to hit targets
Revenue bought with deep discounts, cut-price prepaid deals or stock pushed onto resellers flatters the final year before a sale and is unlikely to last.
Severity: price it inAll business modelsDependence on one marketing channel
When most customers arrive through one ad platform, marketplace, search engine or partner, a change you cannot control can cut revenue quickly.
Severity: price it inAll business modelsCustomer prepayments already spent
When customers have paid in advance and the seller has spent the cash, you inherit the work of delivering without the money that paid for it.
Severity: price it inAll business models
Operations and people
6 red flags
The owner does the selling or holds key relationships
When the owner wins the work and keeps the important relationships, part of the revenue may leave with them. Test how much of that revenue would stay without them before you agree a price.
Severity: price it inAll business modelsUndocumented processes
When the way a business runs lives in one or two people's heads, the handover gets harder and early mistakes get more likely. It is usually fixable if you find it before you sign.
Severity: fixableAll business modelsKey staff not tied in
If the people who hold the business together have no written terms, no notice periods and no reason to stay, a sale is the moment they are most likely to leave. Find out who matters and what keeps them.
Severity: fixableAll business modelsContractors who are employees in practice
Treating people who work like employees as self-employed can flatter profit and build up back taxes and employment claims. Size the exposure and the true cost of labour before you agree a price.
Severity: price it inAll business modelsSupplier or single-source manufacturing concentration
When one manufacturer, wholesaler or platform supplies most of what a business sells or relies on, that supplier controls your margin and your ability to trade. Price in the cost and time of switching.
Severity: price it inAll business modelsFamily or related staff paid off-market rates
Relatives who work for little or nothing make profit look higher than it will be under a new owner, and pay for relatives who do little work is often presented as an add-back. Restate their pay at market rates before you apply a multiple.
Severity: price it inAll business models
Legal and compliance
6 red flags
Pending or threatened litigation
A live or threatened claim can cost a business far more than any damages, and some claims follow the business to a new owner. Find every dispute, understand who carries it after the sale and price or protect against it.
Severity: price it inAll business modelsLicences or permits that do not transfer
If the licence, permit or registration a business needs cannot pass to you, or cannot be obtained in time, you may be buying a business that is not allowed to trade. Confirm the route before you commit.
Severity: deal breakerAll business modelsA lease ending soon or needing landlord consent
For a business tied to its premises, a short lease or a landlord who must consent to the sale can put much of the value at risk. Read the lease early and make the landlord's agreement part of the deal.
Severity: fixableRetail, Hospitality, Healthcare, Manufacturing, Distribution, Logistics, Construction, Agency or services, Ecommerce, OtherIntellectual property held by the owner or freelancers
The brand, code, content or designs a business depends on may legally belong to the owner or to whoever created them. Check ownership and get written assignments in place before completion.
Severity: fixableAll business modelsCustomer data collected without valid consent
An email list or customer database is only worth what you can lawfully use after the sale. If consent was never valid, part of the list, and the revenue it drives, may have to go.
Severity: price it inSaaS, Ecommerce, Content, App, Marketplace, Agency or services, Healthcare, Retail, Hospitality, OtherUnpaid taxes a buyer could inherit
Tax the business should have paid does not disappear when it changes hands. In a share sale it stays with the company you buy, and some unpaid taxes can follow even an asset purchase.
Severity: price it inAll business models
Online and platforms
6 red flags
Traffic reliant on one search engine or exposed to AI search changes
When most visitors arrive from one search engine, the business depends on rankings it does not control. AI-generated answers in search results can also cut clicks while rankings hold steady.
Severity: price it inContent, Ecommerce, SaaS, App, MarketplaceRecent algorithm or policy hits
A sharp fall in traffic, sales or reach after a search update or a platform policy change. The listing's 12-month figures may still include the stronger months before it.
Severity: price it inContent, Ecommerce, App, SaaS, MarketplaceMarketplace account health warnings
Warnings, strikes or weak performance scores on a marketplace or app store account that could lead to listings being removed or the account being suspended. Where most sales run through one account, that can stop revenue overnight.
Severity: price it inEcommerce, AppFake or incentivised reviews
Ratings built on fake reviews, or on reviews customers were rewarded for without saying so. The reputation you think you are buying may not survive scrutiny from platforms or regulators.
Severity: deal breakerAll business modelsDomains or accounts held in personal names
The domain, social profiles, app store, advertising or payment accounts belong to the owner or a freelancer rather than the business. They may not pass to you unless the deal says so.
Severity: fixableAll business modelsCode quality and security debt in software
Software that works today but is hard to change, poorly tested, built on unsupported components or open to attack. The cost of putting it right falls on the buyer.
Severity: price it inSaaS, App, Marketplace
Seller and process
6 red flags
A vague reason for sale
The seller cannot or will not say clearly why the business is for sale, or the story changes. The real reason often tells you what to check first.
Severity: price it inAll business modelsReluctance to share records
The seller delays, filters or refuses access to the financial and operating records you need to check the listing. Past a certain point, what you cannot see matters more than what you can.
Severity: deal breakerAll business modelsPressure to skip diligence
The seller or broker pushes you to commit before you have checked the business, often with tight deadlines, rival bidders or a discount for speed. A sound business survives checking.
Severity: deal breakerAll business modelsRefusal of any seller finance or earn-out
The seller wants the whole price in cash at completion and will not defer any part of it. That can be a reasonable preference, but it can also mean the seller does not expect the business to keep performing.
Severity: price it inAll business modelsRepeated relisting or a long time on the market
The business has been for sale for many months, or withdrawn and listed again, sometimes with a new broker, description or price. Other buyers may already have looked and walked away.
Severity: price it inAll business modelsFigures that change between the teaser and later documents
Revenue, profit or add-backs in the teaser or listing do not match the information memorandum, the management accounts or the tax returns. Some changes have a simple explanation; others mean the first figures were never real.
Severity: price it inAll business models