Red flags when buying a business are usually described as behaviour: the seller who hurries, the broker who deflects, the owner who will not let the buyer meet staff. Those matter, but the reliable red flags are in the file, where they cannot be charmed away. This page lists the ones that appear in specific documents, so the buyer who keeps the diligence list dated will find them on schedule rather than in the final week, and shows where the free checklist sheet on this site puts them.
The returns and the books disagree
Seller's discretionary earnings that appear in a spreadsheet and not in three years of federal tax returns are the first red flag and the most common. A seller who explains that the returns understate the business is asking the buyer to pay for income the seller did not declare. The lender will believe the returns; so should the buyer, and the calculator's coverage test should be run on them.
The lease is short or silent
A lease with less time left than the note, no renewal option or no assignment clause is a red flag whatever the earnings, because the business cannot move without becoming a different business. The landlord's silence when asked for consent is the same flag in another form. Both are found by asking early; the checklist sheet counts the ask as an item with a date.
The document that never arrives
Bank statements, the customer list, the staff contracts: whatever is asked for and not produced is a finding. On the checklist sheet's example 8 of 24 items are outstanding at day 20 with 40 days left, which is normal; the same 8 outstanding at day 50, with the same items on the list each time, is not. The register in Pro shows which items have been outstanding longest.
Questions people ask about red flags when buying a business
Is a seller in a hurry always a red flag?
No. Illness, retirement and a move are ordinary reasons. Hurry becomes a flag when it is used to compress the diligence period; hold the dates.
What about customer concentration?
Sales by customer is on the list for exactly this. A business whose largest customer is half its revenue is a business with one decision-maker who is not the seller.
What should I do with a red flag?
Record it with its date, take it to your attorney or accountant, and price it or walk. The register is where the record lives.