Customer concentration issues, declining revenue, all the red flags…

What if I told you I once bought a business that had these things and still turned it into one of my most profitable exits?

It wasn’t luck. The key was knowing the right questions to ask before making the deal. By asking the right questions, I realized the business itself was solid, and the issue lay with the owner.

Long story short, I bought it, optimized its potential, and sold it five years later for a great return.

Buying a small business is one of the fastest ways to build wealth, but it can also be one of the fastest ways to lose it if you don’t ask the right questions upfront.

After nearly a decade in acquisitions, I’ve refined 10 critical questions to help you avoid bad deals and spot hidden opportunities.

Let’s dive in.

 

1. Why Is the Owner Selling?

First-time buyers focus heavily on this question – and for good reason. 80% of small businesses listed for sale never sell because buyers uncover problems the seller didn’t disclose.

Is the owner selling due to burnout? If they’re emotionally drained running the business, you might be too. Are there financial struggles? If so, is it a cash flow problem, an industry shift, or something external like divorce?

 

Source: Morgan & Westfield

 

Sometimes, a business isn’t failing – it’s just mismanaged.

I once bought a $4M company where the long-time COO quit, and the owner’s wife – who had never worked before – took over. It wasn’t going well. But the business itself turned out to be solid. That’s the kind of hidden potential you want to find.

 

2. What Are the Key Revenue Streams?

The SBA reports that 70% of small businesses rely on fewer than five customers for most of their revenue. That’s a major risk – if even one leaves, the business could collapse.

But revenue diversification isn’t just about risk – it’s also about opportunity.

 

Source: VALUEPROP

 

When I bought a printing company, I knew digital book printing was an emerging trend. I quickly added that as a service and marketed it to existing customers. Within 18 months, it made up 25% of revenue.

That’s the kind of upside you want to look for – a business with a solid foundation but room to grow in ways the seller never capitalized on.

 

3. What’s the Real Cash Flow?

60% of business buyers report uncovering inaccurate financials during due diligence.

Most small business owners aren’t trained in finance. They started in the ’70s and ’80s, built something from scratch, and reported to no one. They drive a Lexus and make six figures, but their books are a little messy.

This isn’t because they’re lying – it’s because they’ve always focused on minimizing taxes, not impressing investors.

This is why you need to validate the seller’s discretionary earnings (SDE). Some brokers clean up financials before listing while others slap together a package and throw it on the market.

I bring in a CPA early to verify cash flow before spending thousands on full due diligence. Make sure you know the real numbers – or risk overpaying for a business that isn’t what it seems.

 

4. Who Are the Key Employees, and Will They Stay?

Losing key employees can cripple a business.

Sometimes, sellers will tell you their key employees are staying, only for you to find out later that one is retiring and the other was already job hunting.

On the other hand, a lot of first-time buyers try to lock employees in with retention bonuses or equity. I think that’s a mistake.

 

Source: BCG Analysis via The Mandarin 

 

If you pay them to stay six to twelve months, you’re incentivizing them to leave after that time. I’m also not giving away equity in a business I just personally guaranteed a loan for, and bonuses set the wrong precedent.

If I were buying a $25M+ company, maybe I’d handle it differently, but in a $1M–$6M SBA-backed deal, I’m not handing out rewards just for staying.

 

How to Handle Employee Turnover

If employees don’t know the business is being sold until the deal is done, they usually stay. It’s when rumors start flying that people panic.

When I take over, I reassure them: Your salary, benefits, and vacation aren’t changing. That’s all most employees care about in the short term.

Expect some turnover within 90 days – it’s normal. The key is making sure the business runs on systems, not just key people.

 

5. What Systems and Processes Are in Place?

You need to know if the business is owner-dependent or systems-driven.

According to the Exit Planning Institute, companies with documented standard operating procedures (SOPs) sell for 20–30x more because they’re easier to scale and less risky to own.

That said, if a business doesn’t have them, that’s an opportunity for you to document key processes so that the business runs without any single person – including you.

The more systems-driven the company is, the more valuable it becomes – not just to you, but to any future buyer.

 

6. What Is the Competitive Landscape?

According to CB Insight, 42% of small businesses fail due to lack of market need. But often, it’s not about demand disappearing – it’s about technology shifting and wiping out entire industries.

Take Fox Photo’s one-hour film development. When digital cameras took off, their billion-dollar industry disappeared in a year.

 

Source: Quick Fox Photo Once Dominated Its Industry

 

So ask yourself: Is this business at risk of disruption, or can it actually benefit from new trends?

AI will kill some industries and skyrocket others. Your job is to spot which side of the equation the business is on.

 

7. What Customer Concentration Risks Exist?

Losing a top customer can shrink revenue by 25–50%.

I once bought a business where one customer made up 24–27% of revenue. They’d been a client for 20+ years, so I thought it was safe. What I didn’t know?

Their contact had recently changed – and the new person played corporate politics like a pro. She leveraged our dependency, tried to force me to extend cash without a PO, and nearly put me in a financial bind.

Lesson learned: If any one customer is more than 20% of revenue, I devalue the company accordingly.

 

8. What Are the Growth Opportunities?

As the oncoming CEO, your job is to evaluate the upside potential. By focusing on growth strategies right when you take over, there’s a good chance you’ll see profitability increase.

By buying a business, you already have a platform to launch from. It already has revenue, infrastructure, and cash flow. Your only job is to step in and improve it.

Some say, “Don’t change anything for a year.” Well, I tried that, and I regretted it.

On the other hand, others overhaul too fast and wreck the existing value in a business.

The key here is creating strategic momentum. New employees want to prove themselves, and if you create winnable opportunities, you build buy-in, strengthen culture, and improve the business – all without unnecessary disruption.

 

9. What Liabilities Am I Inheriting?

Before you buy, dig into lawsuits, debts, and tax issues.

A friend of mine bought a business with a major retail client: Walmart. However, he didn’t realize that their contract allowed them to return unsold inventory at any time.

After the deal closed, Walmart sent back everything, nearly bankrupting him. He survived, but it was brutal.

Whenever you’re evaluating a company, always check for hidden liabilities – leases, debts, OSHA issues, return policies.

 

Source: ConsultPort

 

10. What Is the Seller’s Role Post-Sale?

A strong transition plan can make or break a deal. According to HBR, acquisitions where the transition focuses on integration and value creation have higher success rates, BUT keep in mind this HBR report is looking at $20M+ businesses, not SBA deals.

For SBA-backed deals, I like to download the seller’s brain and get them out within a couple of months. There are exceptions, depending on the business model, but generally, I want to take full control as soon as possible. The key is negotiating a clear transition plan upfront.

And here’s my rule: The seller should transition the business as part of the deal – no extra consulting agreements. You’re already paying them millions, so they owe you at least 90 days post-close to help with the handoff. After that? It’s your business.

 

Final Thoughts

Buying a business is inherently risky – but it should be a calculated risk.

Use these 10 questions to help you spot red flags, uncover hidden gems, and make smart go/no-go decisions.

If you’re ready to acquire a business in the next 12 months, the Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.