RED FLAGS When Buying a Business

You can return a bad watermelon. Nobody takes back a bad business.

Don’t Buy a $200,000 Mistake.

The 10 warning signs experienced buyers catch before they sign — for professionals buying their first business. From someone who’s spent 30 years in the financial markets and watched good people lose their savings to the ones they missed.

Show me the 10 red flags ↓ Watch the 3-min breakdown
A luxury watermelon with a matte dark-green rind crossed by jagged, polished gold veins in kintsugi style, a curved solid-gold stem, resting on a dark slate ledge against a black void.

Most businesses that look like a great buy don’t survive a serious look under the hood. The numbers are tidy, the seller is friendly, the price seems reasonable. And then, more often than you’d expect, the thing that ends up costing the buyer was sitting in plain sight the whole time — easy to miss if you didn’t know to ask.

“What is this seller hoping I won’t check?”

A good deal survives that scrutiny; a bad one needs you in a hurry — which is why a seller who can’t give straight answers tends to push you to decide fast. Don’t let them. The expensive mistakes almost never hide in the asking price.

Here are the ten things I look at first on any deal. Keep a simple tally of how many show up in the business you’re considering. One flag on its own is usually just a reason to ask better questions. Two or three together, with no straight answers, is the moment to slow down.

A bad watermelon costs you $10. A bad business costs you $200,000.

The seller will show you a perfect exterior. The tidy numbers. The friendly handshake.

But you only find out what it’s really made of when you cut it open.

The same gold-veined watermelon cut into two symmetric halves opening like a book, revealing deep ruby-red pulp studded with sparkling crystalline glitter and dark seeds, resting on slate against a black void.

Here’s how to look inside. ↓

The first-pass filter

The 10 Red Flags

The failure points to check before a deal earns a dollar of your due-diligence budget. All ten are on this page, free — no email required.

Profit on paper that never turns into cash

Profit is an opinion. Cash is a fact. A business can report a healthy profit and still struggle to keep money in the bank — and that gap is where buyers get burned. What you’re really buying is the cash you can take home each month to repay your loan, so when the cash can’t be traced, the profit is often a flattering story. With smaller businesses the trap is simple and sneaky: money that came in as a deposit for work not yet done, counted as profit today. Catch it without an expensive report — take three months of bank statements and match deposits against work delivered and invoices paid. If the profit never shows up as money in the account, ask where it went. A sound business answers in a sentence or two.

A profit number that’s been pumped up

Adjusting reported profit is normal — sellers add back their own above-market salary or a personal car run through the company, because those leave when the owner does (it’s called Seller’s Discretionary Earnings, or SDE — the term you’ll see on the listing). The add-backs aren’t the red flag. The red flag is the add-back the seller can’t defend: the salary of an employee you’ll have to keep, a “one-time” expense that appears every year, marketing added back on a business that supposedly grows on word of mouth. It matters because the error multiplies — a small business sells for roughly 3× adjusted profit, so padding earnings by $50K can add ~$150K to the price for profit that was never there. Test every add-back with one question: if I buy this business, does this cost truly disappear, or will I still pay it next year?

The listing numbers don’t match the tax returns

The listing and the tax return are supposed to differ — the listing shows adjusted owner’s earnings, the return shows profit after every deduction. What you’re testing is whether the seller can bridge that gap with documents, dollar for dollar. Watch for “the real number is much higher than the return, trust me.” Sometimes it’s honest add-backs that are easy to prove; other times it’s an owner who took cash off the books and now wants full price for income they never declared. That has a hard edge: a bank lends against the tax returns, not the sales pitch — income that was never reported can’t be financed, no matter how real. Ask for three years of returns, set them beside the listing, and make the seller account for the difference line by line. What they can’t document, you can’t count.

The business runs on the owner

Ask one question and watch how confident the answer is: what happens to sales if you disappear for two months? If the honest answer is that the business would stall, you’ve found the flag. An owner who does a bit of everything is normal for this size — by itself that’s a question of price and handover, not a reason to run, and these deals often work with a long training period or part of the price paid over time. The dangerous version can’t be handed over at all: customers loyal to a person not a company, a licence in the seller’s own name, know-how that lives in one head and was never written down. Look past how busy the owner is and test what actually transfers. If everything walks out the door with the seller, you’re buying yourself a job — and the price should say so.

One or two customers bring in most of the money

When most income comes from one customer, you’re buying a relationship more than a business — and that relationship still belongs to the seller. Know the percentages, because brokers and lenders watch them: past ~10% of revenue, look closer; past 20–25%, banks get nervous about financing at all; past a third, many buyers walk, because losing that account could sink everything — and customers are never more tempted to leave than when the owner they trusted is replaced by a stranger. It’s less dangerous locked into a signed multi-year contract, far more dangerous on a handshake. And it hides: a buyer named Dave Gilbert believed no client was over 10% — but several “different” customers turned out to be one decision-maker behind multiple names. Real concentration was near 30%, and two were gone within the first year.

Sales are sliding while the seller is ‘getting out at the top’

“I just feel it’s time to retire.” Sometimes that’s honest — but it often lands right as the business, or the whole industry, starts shrinking, dressed up as lucky timing. One uncomfortable fact belongs in every conversation: the seller knows this business far better than you ever will — so ask what they can see coming that you can’t. Two things help you see it too: pull MONTHLY figures for the last three years (yearly totals smooth over a line that’s been bending down for twelve months), and look at the profit MARGIN, not just sales — a business can hold revenue flat while the margin erodes underneath. A decline isn’t automatically a reason to walk, but a decline the seller hasn’t explained or priced in certainly is.

Everything depends on one supplier, employee, or platform

Picture a tidy online business where nine of ten sales run through a single Amazon account. It looks diversified across hundreds of customers, but it’s balanced on one point of failure — and the day that account is suspended, the revenue stops overnight. One buyer lost about half his sales when an inherited social-media account was hacked and banned; nothing he could do. The trap takes other shapes: a sole supplier on an exclusive deal with no backup, one master technician everyone depends on. As long as the single link holds, everything looks fine — but you don’t control the link. Find the alternatives, read the contracts that hold the key relationships together, and get it in writing whether the people and partners the business leans on will stay once the seller is gone.

Trouble with the lease and the location

For a business tied to a spot — a café, a car wash, a shop — the lease can be worth more than all the equipment, and a short or shaky one is easy to overlook once you’ve fallen for the location. A hard rule if you’re borrowing on an SBA loan: the remaining lease, including renewals you control, generally has to be at least as long as the loan. A ten-year loan on a business with three years left and no firm right to renew can stall before it starts. The landlord usually has to approve handing the lease to you — and often to your lender too. Read the lease for four things before you fall for the location: how much time is left, whether you have a renewal option you control, whether it transfers at all, and what the landlord must approve.

Skeletons in the closet

This is the legal side — the one buyers most like to assume is fine. Lawsuits, unpaid taxes, debts secured against the equipment, licences that can’t pass to a new owner: none of it shows up in a friendly walkthrough, and all of it can land on you. Correct one common myth: “just buy the assets, not the company, and you leave the old problems behind.” Buying only the assets REDUCES what you inherit — it doesn’t erase it. Unpaid payroll and sales taxes, and certain environmental liabilities, can follow the assets to you. And under current SBA rules, if the seller keeps even a small share, you may have to buy the company itself, history and all. A buyer named Zack Mutnik took over an electrical contractor via a share purchase and inherited two undisclosed lawsuits. Confirm with a lawyer which structure applies, run searches for liens/debts/lawsuits, get a tax-clearance certificate, and hold back part of the price in case something surfaces.

The business arrives with no working capital

This catches more first-time buyers than any other — and almost no one warns them. Buying the business is only half of what you need; from day one it also needs cash to run — to pay suppliers, make payroll, and cover the weeks before customers pay you back. That everyday cash is working capital, and an acquisition loan covers the purchase, not the money the business needs to operate. The classic trap: in the weeks before closing the seller collects every receivable, draws out the cash, and slows paying suppliers. You sign, walk in, and the account is empty — now you’re covering payroll from your own pocket in month one. Settle it before you sign: agree in writing how much working capital stays in the business at closing, based on what it normally needs across a year, and lock that number the way you lock the price. A seller who fights to strip the cash on the way out is telling you something about the months ahead.

Under the surface

Where the Rot Hides: 10 Red Flags, Broken Down on Real Deals

The ten flags above are what you can catch from the surface. Under each one sits the harder part — the specific ways sellers disguise it, and the questions and documents that bring the truth into the open inside a single meeting. I walk through all ten on real deals: what the seller said, what the numbers turned out to show, and how a prepared buyer could have caught it well before signing.

Presented by Alex Mez — 30 years in the financial markets and his own FINRA Registered Broker-Dealer.

Flags 11–20

Want the red flags that didn’t fit on this page?

There are more than ten. Flags 11 through 20 — including the ones specific to financing, valuation, and franchises — go out as a short series of emails, one clear lesson at a time. Leave your email and I’ll send you the next set.

  • When the bank says no — the cheapest second opinion you’ll ever get
  • The seller who wants all cash — and what the missing 10% reveals
  • A price built on the one good year
  • The profit that quietly assumes you’ll work for free
  • The repair bill timed to land on you (deferred maintenance)
  • The two or three employees who could walk in week one
  • The payroll-tax bomb: ‘contractors’ who are really employees
  • The license or permit that doesn’t transfer to you
  • Reviews that were bought — or one bad month from collapse
  • The one page in the franchise disclosure document (FDD) that decides your income — Item 19

No spam. Just the flags, one at a time. Unsubscribe anytime.

Alex Mez holding a halved watermelon with a glowing gold-veined red interior, against a dark background.

Who’s behind this

Why I built this

I’ve spent over 30 years in the financial markets. I run my own FINRA Registered Broker-Dealer, a licensed securities firm. I’ve sat across the table from a lot of people making big money decisions, and I’ve learned to read two things fast: the deal, and the person talking me into it.

Here’s what pushed me to build this. Over the years I watched people close to me buy businesses that should never have been bought. A store, bought without ever verifying the real foot traffic or margins. A café sold on numbers that turned out to be fiction. A restaurant that was priced to fail from day one. Smart people. Good people. They didn’t lose money because they were stupid — they lost it because they saw what they wanted to see instead of what was actually there.

Every one of those deals had red flags you could spot in advance. Nobody was standing next to them asking the uncomfortable questions.

That’s what this is. Not a broker trying to close you. Not a salesman. An honest first look at your deal before you commit the money — so you walk in clear-eyed, not hopeful.

— Alex Mez

Nobody takes back a bad business. But you can cut it open before you buy.

Get flags 11–20 →

What we’re building next

A second opinion on the business you’re actually looking at.

My team and I are building a service that scores the real risk of buying a specific business — and what it’s actually worth — before you commit a dollar.

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