5 Red Flags That Can Derail a Business Sale—Even When You Think You Have the Upper Hand
By: Matthew W. Frank
The sale of a privately held business is often the culmination of decades of work — a high-stakes transaction that is both financially and emotionally significant. Sellers typically assume that the major risks arise during diligence or negotiation of the purchase agreement. In reality, many deals never reach that stage. They quietly fall apart in the early phases, when buyers encounter signals that raise serious concerns before they’ve even opened the data room.
These red flags aren’t always about business fundamentals. Often, they’re about presentation, preparedness, and perception. And in a competitive M&A market, a seller’s failure to address these issues proactively can be fatal to a deal.
If you’re even considering going to market — whether in six months or three years — here are five red flags to identify and eliminate before they cost you real value:
1. Disorganized or Incomplete Financials
Every buyer performs financial diligence, but their first impression often comes from what’s shared during initial conversations: P&L summaries, revenue breakdowns, and basic projections. If those numbers are outdated, inconsistent with tax returns, or prepared on a cash basis without explanation, you’ve already lost credibility.
Even worse is when a business can’t provide clear records at all — when personal expenses run through the business, when multiple entities are comingled, or when historical financials aren’t normalized for one-time events. These signal a lack of sophistication and create uncertainty, which buyers translate into either a discounted purchase price or a hard pass.
Solution: Engage a qualified CPA to clean up your financials and prepare quality of earnings materials, even informally. Normalize your EBITDA and be ready to articulate the story behind your numbers.
2. Unclear Ownership or Capital Structure
Nothing derails a transaction faster than ambiguity about who owns what — and whether they have authority to sell. You’d be surprised how many privately held businesses lack updated operating agreements, have undocumented equity grants, or involve silent partners whose interests were never properly documented.
Buyers need certainty on ownership before they spend money on diligence. If they sense internal dysfunction or anticipate a dispute over sale proceeds, they’ll move on to more stable opportunities.
Solution: Confirm that your cap table is accurate and current. If there are outdated or missing corporate documents (e.g., buy-sell agreements, consents, resolutions), get them fixed before marketing the business. Resolve any shareholder disagreements early — not during the deal.
3. Over-Reliance on a Key Customer or Individual
Customer concentration is a legitimate risk in most privately held businesses, but few sellers are prepared to address how it impacts valuation. If 40–60% of your revenue comes from one customer — especially without a long-term contract — buyers will raise serious concerns about sustainability.
The same goes for key-person risk. If the business is overly reliant on a founder’s relationships, technical know-how, or leadership, buyers worry about what happens post-close.
Solution: Begin transferring relationships where possible. Build systems and processes that can survive a change in leadership. If a major customer or supplier is central to your value, consider negotiating a long-term contract or bringing them into the loop — with care — during negotiations.
4. Undisclosed Legal or Tax Liabilities
Buyers don’t expect perfection, but they do expect transparency. Surprise liabilities — whether it’s a sales tax audit, an unresolved lawsuit, or an employee misclassification issue — are deal killers when discovered late.
Even if a liability is manageable, failing to disclose it early creates a trust issue. A buyer who feels blindsided will question what else they haven’t been told, and may reduce the purchase price, increase escrow, or walk away entirely.
Solution: Conduct a legal audit before you go to market. Identify unresolved issues and work with counsel to either fix them or disclose them properly. Proactive disclosure, when done strategically, is often better than letting buyers discover problems on their own.
5. No Defined Sale Process or Timeline
Serious buyers are attracted to serious sellers. When a business owner signals that they’re “open to offers” but lacks a defined process, timeline, or advisory team, buyers perceive uncertainty. That perception can manifest as indecisiveness, lack of readiness, or fear — none of which inspire confidence.
Worse, when sellers try to manage the process themselves — juggling day-to-day operations while negotiating a major transaction — important details are missed, deadlines are pushed, and deal fatigue sets in.
Solution: Treat the sale like the complex project it is. Engage an advisory team (legal, accounting, financial, and possibly investment banking) and create a clear timeline with defined objectives. Even if you’re pursuing a limited or off-market process, demonstrating preparation and decisiveness builds leverage and trust.
Final Thoughts:
A well-run business doesn’t always translate to a well-run sale. Selling a company — particularly one you’ve built from the ground up — requires not only good fundamentals, but careful preparation and execution. Buyers notice everything. They want clean books, legal clarity, process discipline, and leadership that knows what it wants.
The good news? These red flags are fixable. With foresight and the right team in place, you can remove friction from the process and position your business to command maximum value.
If you’re considering a sale in the next few years — or just want to know whether your business is ready — I’m happy to talk. The best time to prepare for a deal is before you’re in one. Feel free to call me at (248) 740-5672 or email matt.frank@kkue.com.
