Today's SMB Manual explains why legal diligence and a QoE report still leave some risks unexamined, and how operators should test customer concentration, key-person dependency, and the seller's actual reason for exiting before closing.

You are under an LOI on your first acquisition. Your lawyer is conducting legal due diligence, a QoE firm is reviewing 36 months of financials, and the diligence checklist has 140 line items. It feels comprehensive. But it is not. Those things answer two important questions: is the deal legally clean, and do the financials accurately reflect the business’s earnings? What they do not fully answer is whether the business can continue to perform at the same level once the seller is no longer running it.

A meaningful share of signed LOIs never make it to closing, and many more are re-traded during diligence. Legal due diligence identifies liens, lawsuits, assignment clauses, and contract issues. A QoE catches aggressive add-backs, questionable normalization adjustments, and earnings that are not sustainable under new ownership. But some of the biggest risks are operational. They may never appear in a contract or P&L, and they often show up only after closing.

The first is customer concentration. Ask for monthly revenue by customer for the past 36 months and sort the list from largest to smallest. Once a single customer accounts for 20% or more of revenue, concentration warrants its own discussion. The issue is what happens to the business if that customer leaves, reduces volume, changes procurement rules, or renegotiates after an ownership change. A contract can reduce the risk, but it cannot eliminate the dependence.

The second is key-person dependency. The key person is not always the seller. It could be the leader who prices every job, the salesperson who owns the largest accounts, the technician who holds the critical license, or the office manager who knows how every exception is handled. For every critical employee, ask how the business would operate without them for 30 days. If quoting slows down, customers are unsure who to call, schedules become difficult to manage, or important information cannot be easily found, that is a sign the business depends heavily on one person. 

The third is understanding why the seller wants to exit. Retirement is a common explanation, and often a genuine one. But buyers still need to test that explanation against what is happening in the business and what is likely to happen over the next year. Is the largest customer up for renewal? Is a major competitor entering the market? Is the lease expiring? Are margins slipping while revenue looks stable? Is an important employee planning to leave? Has the pipeline weakened over the past six months?

A QoE is designed to assess the business's historical earnings. But it cannot establish how the business will perform once ownership changes. That requires the buyer to look beyond the historical financials. 

Good diligence is detailed and deliberate. Review customer-level revenue across the previous 36 months and, where a large share of revenue depends on one customer, consider how that concentration should affect both the purchase price and the terms of the deal. Once you are far enough into the process, speak directly with the customers that account for the largest share of revenue. Apply the 30-day absence test to every critical employee and identify which parts of the business depend too heavily on a single person. Ask the seller why they are exiting, then use the rest of the diligence process to test that explanation against the sales pipeline, customer relationships, employee dependencies, lease terms, competitive conditions, and any near-term obligations that could affect performance after closing.

Your lawyer verifies the legal structure of the transaction. Your QoE provider verifies the quality of the earnings. You need to verify whether the business is positioned to perform under new ownership.