PE Diligence
Diligence Red Flags That Tank Deals
I’ve sat in diligence rooms where “$4.0M EBITDA” unraveled to $1.2M. Here are the patterns that trigger repricing—or a dead deal.
Four Red Flags
- Customer concentration > 40% in top two accounts. Great relationships are not a moat; they’re single points of failure.
- DSO > 90 days with weak collections. Cash conversion risk is valuation risk.
- One‑time CAT baked into “recurring” EBITDA. Normalize aggressively and be honest about sustainability.
- No leadership depth. If the owner is the business, your “asset” walks at close.
What to Do About It
Fix concentration with MSAs across verticals, shorten DSO with standardized claims documentation, and implement a retention + succession plan. Put the plan in motion before a buyer asks.