The Most Common Red Flags I Spot During Due Diligence

When I first started reviewing businesses, I thought due diligence was just about confirming the numbers: checking revenue, validating expenses, and making sure cash flow matched the seller’s claims. Over time, I learned that due diligence is where the real truths come out. It’s not about proving a deal works, it’s about uncovering what could go wrong.

The longer I’ve been buying businesses, the more I’ve realized that the red flags I spot during diligence often matter more than the opportunities. These red flags don’t always kill a deal, but they shape how I negotiate, structure, and price. If ignored, they can turn what looks like a great acquisition into a disaster.

In this article, I’ll share the most common red flags I’ve spotted during due diligence, the lessons I’ve learned from missing them in the past, and how I now protect myself against them.

Why Red Flags Matter

Numbers are only half the story. A seller can make financials look attractive, but red flags reveal the risks beneath the surface. If I ignore them, I risk overpaying, inheriting liabilities, or stepping into a business that isn’t what it appeared to be.

I’ve learned to treat diligence as a hunt for red flags, not just a checklist of confirmations.

Red Flag 1: Messy or Incomplete Financials

If financials are inconsistent, incomplete, or overly “massaged,” that’s my first warning sign. I look for:

• Personal expenses are buried in the books.
• Large adjustments without documentation.
• Revenue or expense spikes that don’t make sense.
• Missing balance sheets or cash flow statements.

Messy financials don’t always mean fraud, but they always mean risk. If I can’t trust the numbers, I can’t trust the deal.

Red Flag 2: Customer Concentration

I’ve seen too many businesses reliant on one or two major customers. If a single client accounts for more than 40% of revenue, I tread carefully.

I ask: What happens if that customer leaves? Is there a contract in place? Has the relationship been tested by competition? If I don’t like the answers, I either walk or demand a steep discount.

Red Flag 3: Owner Dependency

Another major red flag is when the business revolves around the owner. If they’re the lead salesperson, the problem-solver, and the face of the company, I know transition will be rocky.

If there are no systems, no second-in-command, and no depth in the team, I’d essentially be buying the owner, not the business. That’s not sustainable.

Red Flag 4: High Employee Turnover

Culture leaves clues. High turnover is one of them. If employees don’t stick around, it usually signals poor management, lack of trust, or toxic culture.

I look at employee tenure, exit interviews (if available), and morale during site visits. Employees are often more honest than financial statements.

Red Flag 5: Unclear or Expiring Contracts

Contracts with customers and vendors are the backbone of predictability. If key contracts are missing, poorly written, or close to expiration, that’s a risk.

I’ve walked away from deals where recurring revenue looked strong until I realized the contracts weren’t enforceable.

Red Flag 6: Pending Legal Issues

Lawsuits, disputes, or regulatory problems are major red flags. Even if they’re “minor,” they can become expensive distractions post-close.

I don’t assume problems will vanish after the sale. I either negotiate protections or step away.

Red Flag 7: Industry Decline

A company may look strong, but if the industry itself is shrinking, that’s a hidden risk. I’ve seen businesses with loyal customers and solid operations struggle simply because the market around them was collapsing.

I study long-term industry trends before committing. No strategy can overcome market gravity forever.

Red Flag 8: Overly Optimistic Projections

Every seller has a story about growth potential. But when projections look too good to be true, I discount them heavily.

If growth hasn’t been proven historically, I don’t assume I’ll be the one to unlock it. Optimism without evidence is a red flag.

Red Flag 9: Weak Systems and Processes

If a company runs entirely on “tribal knowledge,” with no documented systems, I know scaling will be painful.

Lack of processes means dependency on individuals, high error rates, and no foundation for growth. That doesn’t kill every deal, but it lowers valuation and increases my workload.

Red Flag 10: Resistance From the Seller

Sometimes the biggest red flag is the seller themselves. If they delay providing documents, dodge questions, or get defensive when I dig deeper, I pay attention.

A transparent seller welcomes diligence. A resistant seller usually has something to hide.

Lessons I’ve Learned From Ignoring Red Flags

I’ve ignored red flags before, and it cost me. In one acquisition, I overlooked customer concentration because I was excited about growth potential. Months later, the key customer left, and revenue collapsed.

In another, I ignored cultural issues flagged by employees. Morale was low, but I thought I could “fix” it quickly. Instead, turnover skyrocketed post-close.

Those mistakes taught me that no deal is worth ignoring red flags.

How I Protect Myself

When I spot red flags, I don’t always walk away. Sometimes I use them to negotiate structure:

• Lower price to account for risk.
• Earnouts are tied to customer retention.
• Holdbacks for potential liabilities.
• Stronger reps and warranties in the purchase agreement.

If the red flags can’t be mitigated, I walk. No opportunity is worth inheriting a hidden disaster.

Final Thoughts

Due diligence isn’t about confirming a seller’s story; it’s about testing it. The red flags I’ve outlined are the ones I’ve seen most often, and each one has the potential to derail a deal if ignored.

I’ve learned to approach diligence with skepticism, discipline, and patience. If I see too many red flags, I step back. If I see manageable risks, I negotiate protections.

Because in the end, success in acquisitions isn’t about finding perfect businesses, it’s about spotting imperfection early and deciding whether it’s manageable or fatal.

I share more about my acquisitions, frameworks, and lessons at DrConnorRobertson.com, where I document the realities of buying and building businesses.