Every business listing is a set of claims. Revenue, owner cash flow, steady customers, and the reason for selling all arrive as statements from the seller. Due diligence turns those statements into evidence a buyer can price, finance, and rely on after closing.
That process now decides more deals than money does. In Axial's analysis of broken letters of intent, diligence findings outside the financials caused 25.3% of failures in 2025, up from 19.1% in 2023. Earnings discrepancies found in quality-of-earnings reviews rose from 10.6% to 21.3%. Financing constraints fell from 21.3% to about 10.7% over the same period1. Together, the two diligence categories account for nearly half of all deals that broke after signing.
The rules changed this month as well. Beginning October 1, SBA lenders underwrite acquisitions under SOP 50 10 8.1. A first-time buyer must show 1.25 times debt service coverage on the business's past earnings, and projections can no longer be used to meet that floor2. Purchases of $3 million or more require an independent quality-of-earnings report, and the lender must use its earnings figure to size the loan2,4.
The lender will verify the earnings either way, but a buyer is better off knowing the answer first.
BizScout marketplace data shows how much depends on that answer. Measured on listed owner cash flow, about 88% of listings clear the new 1.25 times floor at their asking price. If verified earnings came in 25% lower, nearly one in four would fall short3.
Verification matters most where records are least formal. IRS research finds that wages are reported almost perfectly, while about 55% of income with little or no third-party reporting, such as some sole proprietor income, is misreported on net5. That gap is why a seller's "real" number and the number a lender can underwrite are often different numbers.
The number you can finance is the number you can prove.
This report lays out a three-part test for any Main Street acquisition: whether the earnings are real, whether they will endure after the owner leaves, and whether the business carries liabilities the buyer would inherit. It then maps common findings to the deal terms that address them and closes with a 90-day playbook from letter of intent to closing.
The central idea is simple. Diligence is not a pass or fail exam. It is how a buyer discovers the right price.
From Claim to Evidence
Buying an established business means paying for evidence: customers who already pay, existing revenue, and an operating history a buyer can examine before committing. That evidence is the reason acquisition financing exists, and the reason a buyer can know more on day one than a founder knows in year three.
But there's a catch. The evidence rarely arrives as evidence. Instead, it arrives as a listing, a financial summary, and a conversation with the owner. Each one is an unproven claim.
Most of those claims are made in good faith. Owners run small businesses, not accounting departments. Personal and business expenses often mix. Revenue gets recorded when it is convenient. A strong year gets remembered as normal. None of this requires dishonesty, but all of it changes what a business is worth.
The listed earnings figure carries more weight than any other claim, because the price is built on it. On the median business listed on BizScout, the asking price is about 2.73 times annual owner cash flow3. At that multiple, every dollar of earnings that fails to hold up removes about $2.73 of value. A $40,000 overstatement in owner cash flow is a nearly $110,000 overpayment.
An add-back is worth the multiple. So is an error.
Due diligence means testing each claim until it either holds up or changes. This report organizes that work into three tests.
The earnings test
Are the earnings real? Do the tax returns, the internal financials, and the bank deposits tell the same story?
The durability test
Will the earnings survive the handoff? Do they depend on the owner, one customer, one employee, or a lease that may not transfer?
The liability test
What comes with the business that does not show up on the income statement? Taxes, legal claims, permits, liens, and deferred maintenance all transfer risk to the new owner.
What a listing claims, and what diligence verifies.
| The listing says | Diligence asks | Primary evidence |
|---|---|---|
| Owner cash flow of $158,000 | Do adjusted earnings reconcile to tax returns and bank deposits? | Three years of returns, monthly P&Ls, bank statements |
| Long-standing customer base | How concentrated is revenue, and will it stay? | Customer-level revenue by year, contracts |
| Turnkey, staff in place | Who holds the relationships and the know-how? | Org chart, owner hours, key employee terms |
| Prime location | Can the lease transfer, and on what terms? | Lease, landlord consent, renewal options |
| Clean operation | What liabilities transfer with the business? | Lien search, litigation search, tax and permit records |
Where Deals Actually Break
The common story about failed acquisitions is that it was about money. The buyer could not get the loan. Rates moved. The bank said no. That story is outdated.
Axial tracks letters of intent that were signed and later abandoned across lower middle market transactions. In its 2025 analysis of 75 broken deals, diligence findings outside the financials were the single largest cause of failure at 25.3%. Earnings discrepancies uncovered in a quality of earnings review followed at 21.3%. Renegotiation caused 14.7%, seller decisions 13.3%, financing 10.7%, and business underperformance during the sale 8.0%1.
The trend matters more than any single year. Since 2023, earnings discrepancies have doubled as a cause of failure, while financing has fallen by half1.
Diligence has replaced financing as the leading deal killer.
| Reason | 2023 | 2025 |
|---|---|---|
| Diligence findings outside the financials | 19.1% | 25.3% |
| Earnings discrepancies in quality of earnings review | 10.6% | 21.3% |
| Financing constraints | 21.3% | ~10.7% |
The pattern holds among acquisition entrepreneurs. Stanford's 2026 Search Fund Study found that searchers who closed a deal in 2024 or 2025 signed an average of 2.5 letters of intent per acquisition. Asked why earlier LOIs failed, about 79% cited diligence findings and 45% cited valuation disagreements6.
These are well-funded, professionally advised buyers pursuing companies larger than the typical Main Street business. If diligence breaks deals for them, it will break deals for first-time buyers with fewer advisers and thinner records to work from.
Failure is also expensive when it comes late. Deals in Axial's 2025 sample spent an average of 106 days under exclusivity before falling apart1. For Main Street transactions, advisers report that due diligence alone typically runs about three to four months after a signed letter of intent7. Legal fees, accounting fees, lost time, and opportunity cost all add up before the deal-ending finding.
The lesson is not that diligence is dangerous. Most deal killers are found, not random. But the earlier a buyer looks for them, the cheaper they are to find.
The Rulebook Changed
On October 1, 2026, the Small Business Administration began underwriting acquisitions under a new standard operating procedure, SOP 50 10 8.1. The SBA issued it in August and reissued it with technical updates on September 25. It applies to applications the SBA receives on or after October 12.
The update rewrites how SBA 7(a) lenders evaluate a business purchase. Its direction is consistent: lenders now underwrite to earnings that have already happened and have been independently checked.
Coverage is tested on history. A first-time buyer, which the SBA calls an Initial Acquisition, must show at least 1.25 times debt service coverage. Coverage is measured on the most recent fiscal year or a two-year average. Under the prior rules, projected cash flow could meet a 1.15 times standard. Projections can no longer be used to meet the floor for most purchases2.
Every deal gets a lender's valuation. Each SBA-financed change of ownership requires a business valuation prepared for the lender. If the purchase price exceeds the valuation, the difference must come from the buyer's equity. Lenders may perform their own valuation only when the purchase price is $350,000 or less, and the parties are not closely related2.
Larger deals require a quality-of-earnings report. For Initial Acquisitions and Business Expansions with a purchase price of $3 million or more, the lender must obtain an independent quality of earnings report, measured before equity and seller financing. The report must reconcile financial statements, tax returns, and IRS transcripts to normalized earnings and include a cash proof. The lender must use the report's earnings figure in the coverage calculation2,4.
Equity sources are tighter. The 10% equity injection on an Initial Acquisition cannot be reduced. Seller notes on full standby, other standby debt, and minority investors together may supply no more than half of it2.
Seller support has firm limits. A seller may stay on as a consultant for up to 24 months. Seller earnouts are prohibited on SBA-financed deals2.
What changed for SBA acquisition loans on October 1.
| Rule | Before October 1 | From October 1 |
|---|---|---|
| Coverage on a first-time purchase | 1.15x, historical or projected | 1.25x, historical only |
| Quality of earnings report | Not required | Required at $3M+ purchase price |
| Lender's own valuation allowed | Financed amount net of real estate and equipment of $250,000 or less | Purchase price of $350,000 or less |
| Standby seller note toward equity | Up to half of the injection | Up to half, shared with other standby debt and minority investors |
| Seller consulting period | Up to 12 months | Up to 24 months |
Most Main Street acquisitions fall well below the $3 million threshold. Only about 7% of BizScout listings ask $3 million or more3. For the large majority of buyers, no lender will order a quality of earnings report.
That does not make the standard optional. The 1.25 times coverage test still runs on historical earnings, and the lender still values the business. The SBA has effectively published a diligence standard for the entire market. Buyers below the threshold can adopt it voluntarily, and the ones who do will know their deal's financeable number before the lender tells them.
The SBA has effectively published a diligence standard for the entire market.
The updated rules add one more reason to do the work early. A quality of earnings report commissioned by the buyer can now count toward the requirement if one of the lender's approved vendors reviews it. A report prepared by or for the seller cannot2.
This section summarizes SBA policy for general information. Eligibility and terms depend on the lender, borrower, and transaction.
The Earnings Test
Main Street businesses are usually priced on seller's discretionary earnings, or SDE. It starts with net profit and adds back the owner's salary, benefits, interest, depreciation, and expenses that are personal or will not recur under a new owner. SDE is meant to show the total cash a single full-time owner could take from the business.
The concept is sound. The add-backs are where it goes wrong.
The three-way match
The core of the earnings test is reconciliation. Three independent records should describe the same business.
Show what the owner reported to the IRS, under penalty of law.
Show how the owner tracks the business month to month.
Show the cash that actually moved.
When all three agree, the earnings are probably real. When they diverge, the gap needs an explanation the buyer can document. Lenders follow the same logic. Under the updated SBA rules, a required quality-of-earnings report must include cash proof that ties deposits to the income statement and tax returns2,4.
The number a lender can see
A familiar line in small-business sales is that the business makes more than the books show. Sometimes that is true, but it's also not financeable.
IRS research shows how reporting accuracy depends on who else sees the income. Wages, which employers report on W-2s, are reported with about 99% accuracy. Income with little or no third-party reporting, including some sole proprietor income, is misreported at a net rate of about 55%5.
For a buyer, the point is practical, not moral. Unreported income cannot be verified, cannot support a loan, and may carry tax exposure. A seller who asks to be paid for earnings that never appeared on a tax return is asking the buyer to fund the gap personally. The defensible price rests on the earnings the records support.
Grading the add-backs
Every add-back should be sorted into one of three groups before it affects the price.
How to grade an add-back.
| Grade | Definition | Examples | Treatment |
|---|---|---|---|
| Verified | Documented and clearly non-operating | Owner's salary, interest on debt being repaid at closing, depreciation | Include |
| Supportable | Plausible, needs evidence | Owner's vehicle or phone, a one-time legal settlement, a family member's above-market wages | Include only with documentation |
| Unsupported | Cannot be documented or will recur | Unrecorded cash sales, "one-time" repairs that happen every year, expected cost savings | Exclude |
The last group deserves the most skepticism. Projected savings and future improvements belong in the buyer's upside, not in the seller's price.
Large-company data shows why. In its seventh annual EBITDA addback study, S&P Global Ratings found that management earnings projections at deal inception had proven aggressive, with addbacks representing 28% of management-adjusted EBITDA on a median basis over the life of the study8. Main Street deals are smaller and simpler, but the lesson travels: earnings built on adjustments are less reliable than earnings built on records.
What a shortfall does to the deal
Verified earnings that come in below the listed figure do two kinds of damage. They lower the business's value and reduce the cash left over after loan payments, because debt service is fixed at closing.
What happens when verified earnings come in low.
Illustrative deal based on BizScout's median listing: $430,000 purchase price, about 2.7x listed owner cash flow of $158,000, 10% equity, 10-year loan at 11%, annual debt service of about $64,000.
| Verified owner cash flow | Shortfall | Debt service share of cash flow | Remaining owner cash flow | Value at the same multiple | Overpayment |
|---|---|---|---|---|---|
| $158,000 | None | 40% | $94,000 | $430,000 | $0 |
| $142,200 | 10% | 45% | $78,200 | $387,000 | $43,000 |
| $126,400 | 20% | 51% | $62,400 | $344,000 | $86,000 |
| $118,500 | 25% | 54% | $54,500 | $322,500 | $107,500 |
The same math plays out across the marketplace. Using standard SBA terms, BizScout tested every listing against the new 1.25 times coverage floor at its asking price, first on the listed earnings and then on lower ones.
A modest earnings shortfall nearly doubles the share of listings a lender would turn down.
| Verified owner cash flow | Share below 1.25x |
|---|---|
| As listed | 12.3% |
| 10% lower | 15.4% |
| 20% lower | 19.9% |
| 25% lower | 22.7% |
On listed numbers, about 88% of listings clear the floor. That is a generous test. Listed owner cash flow still includes the owner's own pay, and lenders typically leave room for it, so the share that would clear in practice is lower. The direction is the point: if verified earnings come in 25% below the listing, the share that falls short nearly doubles.
Start before the letter of intent
The earnings test doesn't have to wait for full access to the books. Listed figures can be compared with similar businesses on day one. On BizScout, about 1 in 9 listings report an owner cash flow margin at least double the median of similar listings in the same industry and size range3.
That is not evidence of overstatement: some businesses are simply run better than their peers.
But it is a reason to ask how this can be, and to ask before the letter of intent.
The Durability Test
Real earnings are necessary, but they are not always sufficient on their own. A buyer is paying for the earnings the business will produce after the seller leaves, and those can differ sharply from the earnings it produced before.
The most owner-dependent businesses are often the riskiest to inherit. The durability test measures how much of the business transfers with the keys.
Owner dependence
Who answers the phone when the largest customer calls? Who prices jobs, holds the licenses, and knows where the problems are? A business that needs its owner 60 hours a week is selling a job along with the company. The buyer should know which parts of that job they will do themselves and which they will have to hire.
Customer concentration
Revenue from a handful of customers can disappear in a handful of conversations. The test is revenue by customer for at least three years, with attention to how long each relationship has lasted and whether it rests on a contract or a personal relationship with the seller.
Key employees
A lead technician or office manager may carry as much institutional knowledge as the owner. Their plans after the sale belong in diligence, not in the first month of ownership.
Suppliers and channels
A single supplier, distributor, franchisor, or online marketplace can control margins or access. Buyers should confirm that agreements transfer and on what terms.
The lease
For location-dependent businesses, the lease is often the deal's most valuable contract. Remaining term, renewal options, assignment rights, and the landlord's willingness to consent all affect value. A lender financing a 10-year loan will look closely at a lease with two years left.
Licenses and permits
Some licenses belong to the person, not the business. Contractors, health care practices, and regulated trades often need the new owner or a qualified employee to hold credentials before the transfer.
Momentum
In Axial's 2025 data, 8.0% of broken deals failed because the business itself declined during the sale process1. The trailing months matter as much as the trailing years.
The durability scorecard.
| Factor | Lower risk | Higher risk | Evidence to request |
|---|---|---|---|
| Owner role | Manages managers, documented processes | Performs core work, holds every relationship | Owner's weekly schedule, process documents |
| Customers | Broad base, long tenure | One customer is a large share of revenue | Revenue by customer, three years |
| Staff | Stable, cross-trained team | One irreplaceable employee | Org chart, tenure, compensation |
| Suppliers | Multiple sources, assignable terms | One supplier or platform, no contract | Supplier agreements, purchase history |
| Lease | Long term, assignable, renewal options | Short term, landlord consent uncertain | Lease and amendments, landlord estoppel |
| Licenses | Held by the business or transferable | Held personally by the seller | License records, transfer rules |
| Recent trend | Flat or rising monthly revenue | Declining trailing months | Monthly P&Ls through the current month |
A weak score on any factor does not end a deal on its own. It changes what the deal should look like. Section 7 shows how.
The Liability Test
The income statement shows what a business earns, but it doesn't show everything a buyer might owe after closing. The liability test looks for obligations that transfer with the business, often quietly.
Deal structure comes first. In an asset purchase, the buyer acquires selected assets and generally leaves most historical liabilities with the seller. In a stock or membership interest purchase, the buyer acquires the entity itself, including its history. Most Main Street deals are asset purchases, but some licenses, contracts, and leases are easier to keep in a stock purchase. The choice shapes everything else in this, and an attorney and tax adviser should offer advice.
Liens and debts
A UCC lien search shows whether lenders or equipment financers hold claims on business assets. Liens should be paid off at or before closing.
Taxes
Unpaid payroll, sales, and income taxes can follow the business or its assets, depending on the state and the structure. Tax clearance letters, where available, confirm that state accounts are current.
Legal claims
Court record searches, demand letters, customer complaints, and regulatory notices all belong in the file. So do warranties and guarantees the business has promised customers.
Employment
Misclassified contractors, unpaid overtime, and accrued vacation can become the buyer's problem. Payroll records and worker agreements show whether the business follows the rules it must follow.
Compliance and permits
Health, environmental, building, and industry permits should be current and transferable. Businesses that handle fuel, chemicals, or waste may warrant an environmental review of the property.
Physical assets
Equipment condition, deferred maintenance, and vehicle titles determine whether the buyer will need to spend capital soon after closing. A business that looks profitable because it stopped replacing equipment is borrowing from its next owner.
Even large, professionally advised deals find problems here after closing. In Aon's 2025 study of North American transaction insurance claims, breaches of compliance with laws were the most frequent claim type at 20%, followed by tax at 17%, and financial statements and material contracts at 13% each9. These are larger, insured transactions, but the categories map directly onto a Main Street checklist.
Controls matter too. Small businesses typically have fewer checks and balances over who handles cash and records. In the ACFE's 2024 global study of occupational fraud, organizations with fewer than 100 employees had a median loss of $141,000 per case, and the median scheme ran 12 months before detection10. A buyer cannot audit every transaction, but weak controls are a reason to lean harder on bank statements than on internal reports.
Diligence Is Price Discovery
Buyers often treat diligence as a gate: the deal either passes or fails. In practice, most findings do something more useful. They tell the buyer what the business is worth and how the risk should be shared.
A letter of intent sets a price based on the seller's claims. Diligence replaces those claims with evidence. When the evidence differs, the terms should follow it.
The tools for this are well established. Each one moves a specific risk from the buyer back toward the party best positioned to carry it.
Matching what diligence finds to the terms that address it.
| Finding | Typical response | What it does |
|---|---|---|
| Verified earnings below the listed figure | Price adjustment | Resets value to the earnings the records support |
| Earnings real but recent or uneven | Seller note | Seller shares the risk that earnings do not hold |
| Owner holds key relationships | Transition and consulting agreement | Keeps the seller involved through the handoff, up to 24 months on SBA deals |
| Customer concentration | Seller note, or an earnout on non-SBA deals | Ties part of the price to customers staying |
| Possible undisclosed liabilities | Escrow or holdback, plus seller representations | Sets aside funds to cover claims that surface after closing |
| Working capital uncertainty | Working capital target in the purchase agreement | Ensures the business arrives with enough cash, receivables, and inventory to operate |
| Unclear license or lease transfer | Closing condition | No closing until the transfer is confirmed |
| Problems that cannot be priced | Walk away | Protects capital for a better deal |
SBA financing narrows some options. A seller note counts toward the buyer's equity only if it is on full standby, with no payments for the life of the SBA loan. A note that is not on standby counts as debt in the coverage test. Earnouts paid to sellers are not permitted2. Buyers using SBA financing should confirm structures with their lender before proposing them.
Renegotiation has costs of its own. In Axial's 2025 data, 14.7% of broken deals failed on renegotiation1. Sellers resist price changes that feel arbitrary. They are more likely to accept changes tied to specific, documented findings.
Evidence makes the conversation about the business, not about who is being reasonable.
That is the strongest argument for doing diligence carefully. Evidence makes the conversation about the business, not about who is being reasonable.
Walking away belongs on the list. A buyer who has spent three months and several thousand dollars on a deal will feel pressure to close it. That pressure is the sunk cost talking. Overpaying for a business, or leaving too little room for loan payments, is one of the most expensive mistakes a buyer can make, and one of the hardest to undo.
The 90-Day Playbook
Diligence works best as a sequence. Each phase answers the questions that decide whether the next phase is worth paying for. Cheap questions come first. Expensive ones come only after the deal has earned them.
The timeline below assumes a typical Main Street acquisition with SBA financing. Smaller or simpler deals may move faster. Advisers report that due diligence typically takes about three to four months after a signed letter of intent7, so a disciplined 90 days is achievable but not slack.
Before the letter of intent
The goal is to avoid signing an LOI on a deal that fails a basic test.
- Run the coverage math on the listed earnings. At the asking price, with 10% down and a 10-year loan at 11%, a business clears 1.25 times coverage on listed numbers only if the price is no more than about 5.4 times owner cash flow. If it does not clear, the asking price is already above what a lender can finance.
- Compare the listed margin and asking multiple with similar businesses. On BizScout, about 3 in 10 listings ask a multiple more than 30% above similar listings in their sector3.
- Request summary financials: three years of tax returns and a year-to-date P&L.
- Ask the reason for sale, the owner's weekly role, and the share of revenue from the largest customers.
- Talk to an SBA lender early. A lender's informal read on a deal costs nothing.
The first screen catches more than most buyers expect. About 12% of BizScout listings fall below 1.25 times coverage at their asking price on the seller's own numbers. For those listings, the median price cut needed to clear it is about 27%3. That conversation is far easier before a letter of intent than after three months of diligence.
The letter of intent
The LOI sets the diligence rules. It should include a diligence period with a clear end date, access to records and key people, an exclusivity period, a financing contingency, and a statement that the price assumes the earnings will be verified. Most LOIs are not binding on price, but they set expectations that are hard to change later.
The earnings test
This is the most important month. If the earnings fail, nothing else matters.
- Complete the three-way match: tax returns, monthly financials, and bank statements for at least three years plus year-to-date.
- Grade every add-back as verified, supportable, or unsupported.
- Review revenue by customer and by month for concentration and trend.
- Pull IRS tax transcripts to confirm the returns match what was filed.
- Decide whether to commission a quality of earnings review. At $3 million and above, the lender will require one on SBA deals. Below that, a scaled review by a CPA is often worth the cost on any deal with meaningful add-backs.
Durability and liability
- Meet key employees and, with the seller's consent, major customers and suppliers.
- Review the lease and request landlord consent and an estoppel certificate.
- Confirm license and permit transfer requirements.
- Run lien, litigation, and tax searches.
- Inspect equipment and facilities, and estimate near-term capital needs.
- Review payroll records and worker classification.
Financing and closing
- Submit the full loan package and support the lender's valuation.
- Negotiate the purchase agreement: representations, escrow or holdback, working capital target, transition terms, and non-compete.
- Arrange insurance, payroll, banking, and licenses in the buyer's name.
- Do a final walk-through and confirm the business has not declined since the LOI.
- Close.
Who should be on the team
Who should be on the team, and when to bring them in.
| Role | What they do | When to engage |
|---|---|---|
| SBA lender | Confirms financeability, orders the valuation | Before the LOI |
| CPA or quality of earnings provider | Reconciles earnings, reviews add-backs, advises on tax structure | Phase 2 |
| Business attorney | Reviews the LOI, structures the deal, drafts the purchase agreement | Before signing the LOI |
| Insurance broker | Prices coverage the business will need on day one | Phase 3 |
| Industry operator or mentor | Pressure-tests the operating model | Any time |
The core document request
- Federal tax returns, three years, plus IRS transcripts
- Monthly P&L and balance sheets, three years plus year-to-date
- Bank statements for all business accounts, three years
- Revenue by customer, three years
- Payroll registers and employee roster with tenure and pay
- Lease and all amendments
- Supplier, customer, and franchise agreements
- Licenses, permits, and inspection records
- Equipment list with age, condition, and liens
- Sales tax and payroll tax filings
- Pending or past litigation and insurance claims
- Documentation for every add-back
A downloadable version of this checklist accompanies the report.
The Buyer Infrastructure
The playbook above asks a lot of a first-time buyer. Much of the early work, though, can happen before a buyer spends anything on advisers. BizScout is built to move that work forward, so buyers reach the letter of intent knowing which questions matter.
Screen before you engage. Every BizScout marketplace listing carries a BizScout Score, which summarizes valuation, earnings power, and the quality of the data provided. A low data-quality score is not a verdict on the business. It is a signal that more of the evidence will have to come from diligence.
Benchmark the claims. Historical comps show how a listing's asking price and multiple compare with similar businesses on BizScout, and IBISWorld industry data shows growth, margins, and risk for the sector. A price or margin far above its peers is the first question for the seller, not the last.
Find the red flags early. Scout AI reviews a listing and returns a plain-English read with red flags and the questions to ask. The financial modeling tools calculate SDE, projected returns, and a bankability check, so a buyer can test coverage at the asking price before signing anything.
Keep the deal organized. DealOS tracks documents, financials, offers, and next steps from first contact through NDA, letter of intent, purchase agreement, and closing. A long document request is easier to manage when every item has a place.
Get a dedicated adviser. BizScout Private Client pairs buyers with an acquisition partner who builds the pipeline, researches opportunities, and presents businesses that have already been analyzed against the buyer's criteria.
Private Client members also receive access to Contrarian Academy, Codie Sanchez's education and community for business buyers, including expert calls and live deal reviews.
These tools support diligence. They do not replace independent legal, financial, tax, or operational review.
The Price Is a Hypothesis
An asking price is a seller's best estimate of what a business is worth. It rests on claims about earnings, customers, staff, and history. Some will hold. Some will not. Diligence is how a buyer finds out which.
The market is moving in the same direction. Deals now break more often on what buyers find than on whether they can borrow. As of this month, SBA lenders underwrite acquisitions on historical earnings they can verify, and the largest deals require an independent check of those earnings before a loan can close.
For a buyer, that shift is good news. It rewards the discipline that protects buyers anyway. The businesses worth owning are the ones whose earnings survive scrutiny, and the buyers who scrutinize them first will pay the right price for them.
Verify the business before you buy it. Then pay for what you verified.
About This Report
Evidence in this report comes from distinct populations: lower middle market transactions on the Axial platform, US and Canadian search funds, Main Street transactions surveyed by business brokers, IRS compliance research, large leveraged transactions rated by S&P Global, insured transactions in North America, global occupational fraud cases, and BizScout listings. These datasets are not interchangeable, and several describe deals larger than the typical Main Street acquisition. They are used to show direction and mechanism, not to predict outcomes for an individual deal. BizScout figures are point-in-time internal metrics and are unaudited. About 12% of BizScout listings appear to be the same business posted on more than one broker site; removing them changes the reported figures by less than half a percentage point. SBA policy is summarized for general information and does not constitute lending, legal, or tax advice.
- 1.Axial. Dead Deal Report: Unpacking 2025's Broken LOIs, with comparison to 2023 and 2024 editions. Analysis of 75 unsuccessful lower middle market transactions in 2025, by primary reason for failure.
- 2.US Small Business Administration. SOP 50 10 8.1, Lender and Development Company Loan Programs, effective October 1, 2026, including Appendix 15; Information Notice 5000-880695 (August 14, 2026) and Information Notice 5000-882227 (September 25, 2026).
- 3.BizScout Marketplace Data. Point-in-time internal platform metrics, snapshot of October 5, 2026. Active marketplace listings reporting both an asking price and owner cash flow, excluding asking multiples below 0.5x or above 15x (10,424 listings). Coverage assumes 10% equity and a 10-year loan at 11%, with annual payments at 14.88% of the asking price. "Similar listings" are active listings in the same industry and owner cash flow range (under $100K, $100K to $500K, $500K to $2M, $2M and up), with at least 20 listings per group; margin comparisons use only listings that report revenue. Internal metrics are unaudited.
- 4.Professional summaries of SOP 50 10 8.1 quality of earnings requirements: CLA, Bonadio, and StatementsReady.
- 5.Internal Revenue Service. Tax Gap Projections for Tax Year 2022 and supporting tax gap estimates for tax years 2014 to 2016; summarized by the Tax Policy Center. Net misreporting percentages by level of third-party information reporting.
- 6.Stanford Graduate School of Business. Center for Entrepreneurial Studies, 2026 Search Fund Study: Selected Observations, with data through December 31, 2025. LOIs per completed acquisition and reasons for failed LOIs.
- 7.IBBA and M&A Source Market Pulse Survey. (Compiled with Pepperdine University), Q4 2025 through Q2 2026 editions. Time to close and time spent in due diligence.
- 8.S&P Global Ratings. Annual EBITDA addback studies of large M&A and leveraged buyout transactions. Projected adjusted earnings compared with reported earnings in the two years after the deal.
- 9.Aon. Transaction Solutions Global Claims Study, 2025. Frequency of representation and warranty claims by breach type in North America.
- 10.Association of Certified Fraud Examiners. Occupational Fraud 2024: A Report to the Nations. Median loss by organization size and median time to detection.