What Due Diligence Actually Finds
Most buyers think due diligence means reading the financials and asking the seller some questions. That is the part that catches almost nothing.
Real diligence is a process of proving every number in the listing, one document at a time, until you know what you are actually buying. This week we walk through one deal from signed LOI to closing, and show what each step found.
This is a composite deal built from transactions we have worked on. Names, locations, and figures are changed.
The Deal on the Table
Business: Regional hauling and equipment services company in Texas
Operations: 22 trucks run from a leased yard, with nine office and shop employees and 31 contract drivers
Owner: 14 years running it, ready to retire
Asking price: $1,650,000
Revenue (last fiscal year): $7,900,000
SDE per the listing advisor: $540,000
Implied multiple: $1,650,000 ÷ $540,000 = 3.06x SDE ✓
Seller financing offered: 10% of price ($165,000)
At 3x earnings for a business doing almost $8 million in revenue, the buyer thought he had found a bargain. He signed an LOI with a 60-day exclusivity window. Here is what happened next.
Why the Bank Was Not Going to Do This for Him
The buyer financed the deal with a conventional bank loan, his own cash, and a seller note. The bank verified the tax returns and the collateral. That protects the bank, not the buyer.
An SBA lender would not have done it for him either. Under the SBA rules in effect since October 1, 2026, a Quality of Earnings report is only required at a purchase price of $3 million or more, and even then it is a financial review prepared for the lender. At any size, nobody inspects the trucks, interviews the drivers, or reads the customer contracts on the buyer's behalf.
Diligence is the buyer's job. Too many buyers skip it.
The Eight Weeks, Step by Step
Weeks 1 to 2, financial proof. Three years of tax returns tied line by line to the P&L. Twelve months of bank statements tied to reported revenue. Payroll register matched to every person on the add-back schedule.
Weeks 2 to 4, revenue quality. A 24-month invoice register by customer. Every master service agreement with a customer above 10% of revenue, read for term, termination, and assignment clauses.
Weeks 3 to 5, operations. An independent mechanic inspected every truck. Two years of capex and equipment rental history. Each driver's pay arrangement, schedule, and equipment.
Weeks 4 to 6, legal and risk. The yard lease, FMCSA safety records (safety rating, roadside inspections and crash history), three years of insurance loss runs, and a litigation and lien search.
Weeks 6 to 8, working capital and closing. Accounts receivable aging, the working capital target to be delivered at close, and the final purchase agreement.
What Each Step Found
1. Owner pay
$95,000 of "admin salaries" was added back as owner pay. The payroll register showed $42,000 of it went to the owner's nephew, a full-time dispatcher the buyer must keep.
Earnings impact: ($42,000) a year. The add-back was removed.
2. Fleet age
Average truck age was 9 years. Two years of capex totaled $14,000 because the owner rented equipment instead of replacing it.
Earnings impact: ($65,000) a year for a replacement reserve. The price came down.
3. Truck condition
The buyer's independent mechanic found four trucks needing $85,000 in repairs.
Earnings impact: none; it is a one-time cost. The seller gave an $85,000 credit at closing.
4. Driver classification
Four of the 31 contract drivers work only for the company, on set schedules, in company trucks. Under the IRS, Labor Department and Texas tests, those look like employees.
Earnings impact: ($36,000) a year to put them on payroll. A $60,000 escrow, plus a seller indemnity, now covers past tax and wage exposure.
5. Insurance
Loss runs showed two claims in three years. The renewal quote under new ownership came in $25,000 a year higher.
Earnings impact: ($25,000) a year. The price came down.
6. Top customer
One customer was 41% of revenue, on a contract it can cancel with 30 days' notice. Volume discounts to that customer nearly doubled in two years.
Earnings impact: none today. The customer's consent to assignment became a closing condition, and the seller note carries an offset if that customer leaves.
7. Yard lease
20 months were left on the lease, and assignment needs the landlord's consent.
Earnings impact: none today. A new 5-year lease became a closing condition.
8. Working capital
Customers pay in 58 days on average, so roughly $1.25 million is always tied up in receivables. The business cannot run without it.
Earnings impact: none. The purchase agreement sets a working capital target the seller must deliver at closing, so the buyer does not fund it on day one.
Add it up:
Listed SDE: $540,000
Nephew on payroll: ($42,000)
Fleet replacement reserve: ($65,000)
Four drivers on payroll: ($36,000)
Higher insurance: ($25,000)
Real yearly earnings: $372,000 ✓
The $85,000 of repairs is a one-time cost, so it came off at closing instead.
At the asking price, he would have paid $1,650,000 ÷ $372,000 = 4.4x real earnings ✓ for a business whose largest customer, 41% of revenue, can leave on 30 days' notice.
How the Deal Changed
The buyer did not walk. He went back to the seller with documents, not opinions.
Price: $1,650,000 → $1,200,000 ($1,200,000 ÷ $372,000 = 3.2x verified earnings ✓)
Repair credit: none → $85,000 at closing
Seller note: 10% ($165,000), standard terms → $180,000 (15% of price), with the right to offset if the top customer leaves within 12 months
Escrow: none → $60,000, plus a seller indemnity, for driver classification claims
Closing conditions: standard → customer consent to assignment and a new 5-year yard lease
Working capital: not addressed → defined target delivered at closing
The price came down $450,000, and the seller paid for $85,000 of truck repairs through a credit at closing. Under the original terms, the buyer would have paid $1,650,000 and then fixed the trucks himself. That is $535,000 ✓ he did not have to spend. The customer risk is now backed by the seller's note, the lease is fixed before closing, and the driver exposure sits in escrow.
The seller accepted. Every reduction was tied to a document he had provided himself, an independent inspection, or an insurer's quote, and the buyer was still his most credible way to retire.
The Lesson
Nothing in this deal was hidden. The nephew was on the payroll register. The truck ages were on the title list. The cancellation clause was in the contract.
Most of the problems were sitting in documents the seller handed over. The rest showed up the moment someone inspected the trucks and asked an insurer for a quote.
The difference between a good acquisition and a bad one is rarely what the seller discloses. It is whether someone on the buyer's side knows which documents to ask for, and what to look for once they arrive. A $600,000 salon and a $20 million distributor need different checklists, but the discipline is the same.
Finding the Deal Was the Easy Part
This company was easy to find. The listing looked great, the multiple looked cheap, and the seller was motivated.
Deal sourcing is the easiest part of buying a business. Due diligence is where you find out what you are actually buying, and it is where buyers win or lose the most money. That is the work we do every day.
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