When buying businesses, due diligence doesn’t simply mean dotting your Is and crossing your Ts—it’s a safety net to help you avoid costly surprises. Buying a business is about knowing precisely what you’re getting, not just liking the idea. Due diligence is the investigative process that uncovers the good, the bad, and the potentially disastrous hiding beneath the surface.

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Yet even savvy buyers get burned. Rushing through due diligence or assuming everything checks out can lead to overpaying, inheriting hidden problems, or buying a business that isn’t viable long-term.

Let’s look at buyers' three most common due diligence mistakes—and how to avoid them.

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Mistake #1: Skimming the Financial Review Without Digging Deep

Financials are the foundation of any deal. But too often, buyers rely solely on the seller’s reports without verifying them. That’s like buying a house based only on the realtor’s brochure.

For example, suppose you purchase a small manufacturing company with a “consistent” $1.5M annual revenue. After closing, you discover that nearly 40% of the prior year’s sales came from a lucky one-time contract. Suddenly, your revenue drops to $900K over the next year, turning your supposedly profitable business into a significant expense.

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What to look for:

• Inconsistent revenue trends or sudden spikes.
• Overdependence on just a few customers (anything over 20–30% is risky).
• Unrecorded liabilities like pending tax bills or supplier debts.
• Working capital needs—if the business runs “cash hungry,” you may need to inject more funds than planned.

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Pro tip: Get a Quality of Earnings (QoE) report from an independent Certified Professional Accountant (CPA). It confirms the numbers and tests whether the earnings are sustainable.

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Mistake #2: Ignoring Operational Risks and Red Flags

Impressive numbers can mask weak operations. If you buy a business without understanding how it runs, you may inherit problems that quickly erode profits. For instance, you might buy a profitable business but if the founder’s retirement erases decades of customer relationships, you could suddenly lose your business’s most lucrative contracts and the profits that go with them.

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What to look for:

• Key-person dependency: Would the business collapse if one person left?
• Technology and processes: Outdated systems can require pricey upgrades.
• Vendor and customer concentration: Losing one big account could ruin cash flow.
• Compliance issues: Safety or regulatory fines can be expensive and reputation-damaging.

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Pro tip: Understand the business’s reliance on the current owner and identify whether they hold too much knowledge or responsibility. If the business can’t run smoothly without them, that’s a red flag worth factoring into your valuation.

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Mistake #3: Treating the Legal Review as a Formality

The legal review is a speedbump in the best way—it slows the process down and helps you shield yourself against future liabilities. It isn’t something you want to skim, and you certainly don’t want to trust the seller’s attorney when they say, “It’s already taken care of.” Those mistakes lead to missed clauses that result in location shutdowns and voided contracts once the keys are handed over.

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What to look for:

• Ownership of intellectual property, brand names, and customer lists.
• Pending or potential lawsuits.
• Compliance with all licensing, zoning, and regulatory requirements.
• Lease and vendor contract terms with clauses that change after you take over.

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Pro tip: The nuances of purchase agreements, reps and warranties, and indemnification clauses are too specialised for a general business lawyer—use an experienced M&A lawyer instead.

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Conclusion

Due diligence done right pays for itself. The problems won’t go away just because you didn’t find them, so make sure you look hard. By digging deep into financials, assessing operational and owner dependency, and conducting a detailed legal review, you minimise the risk of post-sale surprises and position yourself for a smoother, more profitable acquisition.

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Treat due diligence as an investment in your investment. And if you’re unsure what to look for, work with a business broker who knows how to find—and address—the red flags before you sign.

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