8 real forensic analyses across different industries. These are the hidden red flags that cost searchers $200K+ in bad deals.
VERDICT: Solid fundamentals with verified earnings, but priced at an unrealistic 5x multiple that needs correction.
Customer Concentration: 12%
Excellent diversification for a local service business. Many HVAC companies run 25–30%+ concentration in their top customers. This spread indicates a resilient book of business and supports a stronger valuation multiple.
VERDICT: This business is functionally insolvent with catastrophic DSCR of 0.47 and 50% phantom earnings.
Customer Concentration: 58%
More than half of all revenue depends on one relationship. In this segment, lenders generally want to see no single customer above the mid‑20s as a percent of sales. If this anchor account leaves or renegotiates, the P&L collapses and most SBA underwriters will walk away.
VERDICT: Nearly 40% of claimed earnings are unsustainable or fabricated add-backs.
Excessive Personal Expenses:
$6,200/month ($74,400 annually) in owner expenses added back — significantly above industry norms for a restaurant of this size. Real discretionary spending likely half this amount.
VERDICT: Solid business with 9.4% earnings inflation that's still worth pursuing aggressively.
Customer Concentration: 4%
Healthy diversification - extremely well-distributed customer base provides stability and reduced risk. This is a defensive characteristic that supports premium valuation.
VERDICT: This business is in serious distress. The real earnings are $75,000, not $150,000, and the debt service coverage ratio of 0.47 indicates technical insolvency.
Customer Concentration: 67%
Two‑thirds of agency billings roll up to one client group. That’s not a portfolio, it’s a single point of failure. When you combine this exposure with already thin true earnings, the profile shifts from “growth acquisition” to “turnaround where you’re buying a problem contract.”
VERDICT: Nearly 40% of claimed earnings are unsupported fluff. Deferred revenue creates significant valuation gap.
Deferred Revenue Liability: $950,000
SEVERE RED FLAG. This represents nearly 63% of annual earnings. The seller has already spent the cash, leaving you with the obligation to train those members for free. This is a revenue recognition manipulation red flag.
VERDICT: This business is a house of cards built on phantom earnings and dangerous customer concentration.
Customer Concentration: 65%
For route‑based cleaning companies, healthy books spread larger contracts across many sites. Here, a single account controls nearly two‑thirds of revenue. Losing or repricing that contract would blow a hole in cash flow big enough that conventional and SBA lenders are almost certain to decline financing.
VERDICT: SBA Loan Rejection Guaranteed. The cash flow is too low to service debt at this asking price. Bank will reject this deal instantly.
SBA DSCR Failure:
Reported SDE of $150K is too low to service a standard 10-year SBA loan on a $1.2M purchase. Banks require minimum 1.25x DSCR (Debt Service Coverage Ratio). This deal shows 0.63x. The bank will reject this instantly, but you were about to spend $5K on legal fees.
Every one of these deals would have passed a casual review. The red flags were buried on page 34, hidden in footnotes, or disguised as "industry standard" practices.
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