5 red flags buyers miss when acquiring a small business under $5M
First-time buyers often focus on the headline SDE or EBITDA multiple. The multiple matters, but the real surprises usually hide in operating details that do not fit neatly into the teaser.
Customer concentration
If one customer drives 20–30%+ of revenue, you are underwriting that relationship as much as you are underwriting the business. Ask how long the customer has stayed, who owns the relationship, whether terms changed recently, and what happens if the account leaves during transition.
Add-backs that do not hold up
Owner salary, personal expenses, one-time costs, and projected synergies can make earnings look cleaner than they are. Separate defensible historical adjustments from optimistic buyer-side assumptions before applying a multiple.
Lease obligations
A below-market lease, upcoming renewal, assignment restriction, deferred maintenance issue, or personal guarantee can change the deal economics quickly. The lease is often a hidden operating liability, not just a facilities document.
Owner dependency
When sales, pricing, vendor relationships, hiring, and key customer trust all sit with the seller, the transition risk is high. Map what the owner actually does week to week before assuming a smooth handoff.
Working capital swings
Inventory builds, AR timing, customer deposits, seasonality, and vendor payment cycles can add real cash needs after closing. Model the peak-to-trough swings so the purchase price does not understate the capital required to run the company.