Most buyers learn this the expensive way. The bank's underwriter says no, the fees are already spent, and the deal that "fell apart in diligence" had been telling you it was going to fall apart for six weeks.
I've been on the buy side of lower middle market deals since 2002. Sixty two locations later, the pattern is the same. The deals that died in underwriting had already given me the signal. I just didn't want to hear it yet.
So here are the five signals I use now. If I see one, I slow down. If I see two, I walk.
1. The seller answers a different question than the one I asked
I ask why revenue dipped in Q3. I get a story about a great new hire in Q4.
That's not a lie. It's a reflex. But a seller who redirects on the small questions will redirect on the big ones, and by the time you find out what they were steering around, you've paid for a QoE.
Ask the question twice. If the second answer is also a story, you have your answer.
2. The owner is the machine
Every business has a person who knows where the bodies are buried. In a lot of small companies, that person is also the salesperson, the estimator, the collections department, and the reason the top three customers stay.
You're not buying a business. You're buying a job that used to belong to someone who's about to leave.
Test: ask what happens if the owner takes six weeks off. If the honest answer is "things get tight," the multiple should reflect that. If the answer is "we've never tried," there's your diligence item.
3. The adjusted EBITDA has more adjustments than EBITDA
Add backs are legitimate. Owner salary, one time legal, the truck that's really his son's truck. Fine.
But when the adjustment schedule runs longer than the P&L, the seller isn't showing you the business. He's showing you a business that could exist if everything went right.
My rule: I underwrite to the number with half the add backs removed. If the deal still works, it works. If it only works with every adjustment intact, it was never a deal. It was a pitch deck.
4. Concentration that nobody wants to talk about
Top customer at 35% is a conversation. Top customer at 35% with a contract renewing in the next 18 months is a different conversation. Top customer at 35%, renewal coming, and the seller says "they'd never leave"...
That's not concentration risk. That's a hostage situation you're paying to take over.
Same logic on the supply side. One vendor, one key account, one landlord who owns the only building that works. Any single point of failure the seller describes as "a great relationship" is a number you need to discount.
5. The buyer is me, and I'm in love
This one nobody puts in a checklist because it's about the person doing the checklist.
Every buyer has a deal they wanted too much. Great story, clean building, seller you liked. You start writing the LOI in your head before the CIM is done.
That's the moment to hand the numbers to someone who doesn't care. A lender, a partner, a CPA who bills you regardless. Good lenders have seen enough deals to know when one is drifting. The value of that conversation isn't the loan. It's the friction.
What walking away actually costs
Nothing that shows up on a tax return.
What it saves is the personal guarantee, the two years of your life, and the version of you that has to explain to your family why the wealth machine ran in reverse.
Killing a deal isn't a failed outcome. It's the outcome working. The buyers who last in this market aren't the ones who close the most. They're the ones who walked away from the right ones...
Forward motion,
Fadi