Transcript
Memo Parts 6 of 6. Due diligence, the pipeline, and what could not be verified. 10. Due diligence, staged with kill gates. Five stages, each with a gate that can end the deal before money gets spent on professionals. Pick a stage. Stage 0. Quick screen. 30 minutes. Pre-NDA. Kills about 80% of listings. Price and recast SDE multiple inside the buy box band after a rough manager's salary deduction. 3 plus years operating, location, owner hours, and manager in-place claims all plausible.
Recurring percentage and top customer percentage stated. Lease and license basics known. Reason for selling clear. Retirement is a green flag at this size. Listing age, price cuts, and duplicate listings on other platforms checked. Same photos, same numbers. Google reviews, BBB, Secretary of State status active. UCC and Lean Search done. Gate. Any two unknowns that are buy box hard passes means pass in the tracker. Do not watch it. Stage 1. Broker or seller call. 30 to 45 minutes.
After NDA. Who does what daily? Draw the org chart from the call. Not from the CIM. GM. Tenure. Pay versus market. Staying. The owner's real weekly hours by task. Top 5 customers. Percentage of revenue and contract terms. License holder and transfer path. Lease term, options, and whether the landlord knows about the sale. The add-back list, line by line. What proof exists for each one? Seller note, standby, and transition flexibility. SBA pre-qualified. By whom, when, and on which year's financials. Staff.
W2 versus 1099. Family employees. Pay versus market. Gate. No tax returns and diligence. No credible manager's story. Or a license or lease blocker means stop here before spending on professionals. Stage 2. Financial diligence. Weeks 1 to 3 after LOI. Three years of business tax returns plus IRS transcripts. Seller copies can be altered. Transcripts cannot. Year to date and prior year to date monthly P&L and balance sheets. 12 to 24 months of bank statements. Proof of cash.
P&L revenue against tax return against bank deposits. Month by month. Explain every variance. Recast SDE from source documents. Every add-back tied to a receipt or payroll record. Deduct a market GM salary, market rent, family labor replacement, normalized KPEX, and working capital. AR and AP aging. Deferred revenue and prepaid customers have paid for. You inherit the obligation. Inventory at cost with obsolescence. Count it. Equipment list, age, and deferred maintenance KPEX.
Debt schedule, owner loans, merchant cash, advance, or daily debit loans. A deal killer until quantified. Sales tax and payroll tax currency letters, customer cohort and churn, SAAS and agency, or repeat and rebooking rate, local services. Lender package in parallel. DSCR on recast historicals against the 1.25 times floor. Valuation ordered early under SOP 5010 8.1. Recovery lube root is quality of earnings. A self-performed proof of cash plus a CPA recast is proportionate under $1 million.
A formal quality of earnings at $1 million in up or whenever the numbers wobble earns its fee at a market cost of roughly 5k to 6k over about two weeks. Stage three. Operational diligence weeks two to four after LOI. Site visits including an unannounced visit as a customer or a mystery shop where ethical and broker approved. Watch the GM run a day without the owner. Systems audit. This buyer's edge cuts both ways.
CRM data quality, pipeline hygiene, dispatch and booking, automations and who owns the accounts, domains, phone numbers and ad accounts. A transfer list in writing. Key employee calls, staged, seller approved, late stage, the GM and the number two. Retention risk gets priced or retained with stay bonuses.
Water and supplier contracts, assignability and pending price increases, insurance, claims history, safety and OSHA, trades and pet, pet specific, incident and bite history, vaccination policy enforcement, camera coverage, county permits, digital deals, analytics and payment processor, read only access, not screenshots, code repo and contractor IP assignments, app store and API dependencies, support inbox volume for 90 days.
Stage four, legal and closing, weeks three to six plus, SBA deals, plan 60 to 120 days from LOI to funding, asset versus stock, decided with tax council, allocation schedule, APA reps and warranties, indemnity cap and basket and an escrow hold back of 5 to 10% for 6 to 12 months on any concentration or verification soft spot.
Working capital peg, defined, gas in the tank, seller note documents, standby subordination exactly as the SBA lender requires, full standby for any note counting as equity, non-compete and non-solicent, seller plus spouse or key family if they worked.
In the business, a transition services schedule with hours and an end date and a customer and employee announcement plan, lease assignment or a new lease signed as a closing condition, license transfers filed, entity, EIN, bank and merchant accounts, domain, CRM and phone porting checklist, closing funds flow with the lender and closing attorney, a post close 30, 60, 90-day owner plan, keep the GM cadence, no day one changes except cash controls, pipeline, 11 pipeline tracker design, one row per deal, review weekly, kill fast, this is the eck structure to build as the notion tracker, one database, these stages, these fields, TEAL stays an open experiment as a second tracker, it has not been tested for this job yet and nothing below depends on it, lead, screened, stage zero, NDA, CIM, broker call, LOI draft.