Red Flags Checklist - The Blueprint System

⚠️ ABSOLUTE DEAL KILLERS

Walk away immediately if you find ANY of these:

Refuses to provide tax returns
Books don't match tax returns by >10%
Undisclosed lawsuits or major liens
Lost biggest customer (>30% revenue)
Environmental contamination hidden
Criminal activity or fraud evidence

Financial Red Flags

Revenue & Sales

🚩 Declining revenue trend

3+ months of decline = investigate
6+ months = major concern
Year-over-year decline = renegotiate

🚩 Customer concentration >25%

One customer >25% = high risk
Top 3 customers >50% = very high risk
No contracts with major customers = deal killer

⚠️ Unusual revenue patterns

Big spike before sale
Pulling forward future sales
Channel stuffing indicators
Seasonal not disclosed

Expenses & Margins

Red Flag	What to Look For	Severity
Declining margins	GP down >5% YoY	HIGH
Hidden personal expenses	Cars, trips, family on payroll	MEDIUM
Understated expenses	Deferred maintenance, old equipment	HIGH
No expense accruals	Cash basis hiding liabilities	MEDIUM
Rising COGS %	Supplier issues, competition	HIGH

Operational Red Flags

Employee Issues

🚩 High turnover (>30% annually)

Check: Employee roster year-over-year

Ask: Why people left, exit interview notes

🚩 Key employee dependencies

One person has all customer relationships
Critical knowledge not documented
No succession planning
Owner's family in key roles

⚠️ Compensation issues

Below market wages
No benefits offered
Contractor misclassification
Overtime lawsuits pending

Customer & Market Red Flags

Legal & Compliance Red Flags

Category	Red Flag	How to Verify	Impact
Contracts	Month-to-month only	Review all agreements	HIGH
Pricing	No increases in 3+ years	Check invoices over time	MEDIUM
Competition	New entrant taking share	Mystery shop competitors	HIGH
Technology	Disruption threat	Industry research	HIGH
Reputation	Bad reviews trending	Check all review sites	MEDIUM

Litigation Landmines

Active lawsuits not disclosed
EEOC or discrimination claims
Warranty claims trending up
Regulatory investigations
IP infringement notices

Compliance Issues

🚩 License & permit problems

Expired licenses operating anyway
Missing required permits
Violations not remedied
Insurance gaps or cancellations

⚠️ Tax red flags

Payroll tax deposits behind
Sales tax audits pending
Worker classification issues
Cash transactions >$10k

Asset & Equipment Red Flags

Physical Asset Issues

Asset Type	Red Flag	Cost Impact
Equipment	Average age >80% of useful life	$100-500k CapEx needed
Vehicles	Leases expiring <6 months	$50-200k replacement
Technology	Systems 5+ years old	$25-100k upgrade
Facility	Deferred maintenance visible	$50-250k repairs
Inventory	>20% obsolete/slow moving	20-40% write-down

Seller Behavior Red Flags

🚩 Urgency without explanation

"Must close in 30 days"
Pushing to skip due diligence
Emotional about specific dates
Won't explain rush

Reality: Hidden problem about to surface

🚩 Information games

Delays providing requested docs
"Lost" important records
Different versions of financials
Defensive about questions
Lawyer heavy involvement early

⚠️ Story changes

Reason for selling shifts
Numbers don't match discussions
New issues keep appearing
Blames everyone else

Industry-Specific Red Flags

Service Businesses

🚩 No recurring revenue (all project-based)
🚩 No service agreements
⚠️ Warranty claims rising
⚠️ Seasonal not disclosed
⚠️ Price shopping increasing

Manufacturing

🚩 Single supplier dependency
🚩 EPA violations history
🚩 Union organizing activity
⚠️ International competition
⚠️ Raw material costs rising

Retail/Restaurant

🚩 Lease expiring <2 years
🚩 Declining foot traffic
🚩 Online competition growing
⚠️ Minimum wage increases coming
⚠️ Yelp reviews declining

Financial Statement Red Flags

Balance Sheet Bombs

🚩 Working capital issues

Current ratio <1.0
Receivables aging >90 days
Inventory turns declining
Payables stretched
Line of credit maxed

🚩 Hidden liabilities

Off-balance sheet obligations
Personal guarantees by owner
Pending lawsuits not accrued
Unfunded pension obligations
Warranty reserves inadequate

Due Diligence Process Red Flags

The Ultimate Red Flag Scoring System

Stage	Red Flag	What It Means
Initial	NDA resistance	Not serious or hiding something
Financial	No CPA-prepared statements	Books likely a mess
Legal	Missing corporate records	Compliance problems likely
Operational	Can't meet key employees	Retention risk or they don't know
Final	Renegotiation attempts	Testing your resolve or new issues

Score Each Red Flag

HIGH (3 points): Major impact on value/operations
MEDIUM (2 points): Fixable but costly
LOW (1 point): Minor issue

Total Score Action Guide

0-5 points: Normal deal, proceed
6-10 points: Negotiate price reduction 10-20%
11-15 points: Major restructure needed
16+ points: Walk away

How to Use This Checklist

Due Diligence Process

Week 1: Financial red flags review
Week 2: Operational assessment
Week 3: Legal and compliance
Week 4: Deep dive on findings

For Each Red Flag Found

Document exactly what you found
Quantify financial impact
Determine if fixable
Calculate cost to remedy
Decide: Renegotiate, restructure, or run

Remember: Trust Your Gut

If something feels wrong, it probably is. The best deal you'll ever make might be the one you walk away from.