Can You Prove It? What Diligence Looks Like in a Smaller Deal

By the time diligence starts, the price is already agreed, and a lot of owners relax at exactly the wrong moment. In smaller transactions, diligence is where deals wobble — not because buyers find fraud, but because sellers can't document things that are perfectly true. The whole exercise is one question asked fifty different ways: can you prove it? Here is what proving it actually involves in a business selling on SDE.

1. The tax returns are the referee

Your P&L says one thing, your tax returns say another, and the buyer will believe the returns — so will their lender. Most of the individual buyers I work with in the Triangle are financing part of the purchase with an SBA loan, and the bank underwrites off filed returns, period. If the two sets of numbers don't reconcile, the burden of explaining sits with you. And the oldest small-business trap is cash that never hit the books: you saved on taxes for years, and now you're asking a buyer to pay a multiple of income you can't show. You can't have it both ways. Unreported income isn't just unprovable — as far as the deal is concerned, it doesn't exist.

2. Every add-back needs a receipt

SDE is built by starting with the tax number and adding back what the business paid for that a new owner wouldn't: your salary, the truck, the health insurance, the one-time roof repair. That's legitimate — it's how smaller businesses are valued. But each add-back is a claim, and each claim gets tested. The vehicle add-back needs the loan statement. The one-time expense needs the invoice showing what it was. A schedule of add-backs with documentation behind each line sails through. A round number with "owner perks" written next to it gets discounted, and the discount comes straight off your price at three times or so the annual amount.

3. The lease can outvote the price

If your business depends on its location, the lease is not paperwork — it's an asset, and sometimes it's the deal. The buyer needs the space, the lender usually wants lease term (with options) running at least as long as the loan, and the landlord's consent to assignment is a yes you don't control. I've watched more small deals strain over lease assignments than over price. Read your lease before you go to market: what does it say about assignment, how much term is left, what can the landlord demand? Knowing when and how to approach the landlord is a timing decision worth getting right, because a surprised landlord is rarely a cooperative one.

4. Licenses, permits, and who has to say yes

Whatever lets the business legally operate — contractor licenses, health permits, dealer agreements, a franchise agreement — the buyer's attorney will ask the same two things about each: does it transfer, and who has to approve? Some licenses require the buyer to qualify on their own. Franchisors run their own approval process on their own calendar. None of this is a reason a deal can't close, but every one of these approvals takes weeks, and the time to map them is before a buyer is waiting on the answer.

5. They will kick the tires — literally

At some point diligence walks out of the data room and into your shop. Equipment gets looked at for age, condition, and the maintenance you deferred because you knew you were selling. Inventory gets counted at close, at cost, and the stale half of it gets argued about. Vehicles, the condition of the roof, the compressor that's original to the building — a buyer is pricing what it costs to own this business after you're gone, and worn-out iron reads as a bill they'll be paying. A year of catching up on maintenance beats a closing-table negotiation about it.

The takeaway

Diligence isn't an exam you can cram for the week before. The proof file gets built while you own the business: returns that match the books, add-backs with paper behind them, a lease with term left, licenses you've mapped, equipment you'd be comfortable selling a friend. Sellers who can prove what they claim close at the price they agreed to. Sellers who can't, close late, lower — or not at all.

Thinking about what comes next for your business? Download the free guide — 7 Critical Points Every Business Owner Must Know Before Selling — or book a confidential conversation with Don Emmett. Straight answers from someone who's sat on your side of the table.