Jan 12, 2026
Due Diligence in SMB Acquisitions: What Actually Matters (And What Can Kill Your Deal)
For most first-time acquirers, due diligence is where the dream meets reality. The heads of terms are signed, the deal feels real, and suddenly you're staring down a data room full of documents while lawyers' fees tick upward by the hour.
It's also where deals die, often unnecessarily.
According to experienced acquirers, more deals fail during due diligence due to poor preparation than fatal flaws in the target business. The difference between buyers who close successfully and those who walk away frustrated usually isn't luck. It's knowing where to focus, what to ask for, and how to spot the warning signs that actually matter.
This guide breaks down due diligence for small and mid-sized acquisitions, with practical insights drawn from buyers who've been through the process multiple times on both sides of the table.
What Due Diligence Actually Is
Due diligence is your chance to verify reality.
Everything you've seen up to this point - the information memorandum, broker calls, financial summaries, growth stories - is a version of the business presented by the seller. Due diligence is where you lift the floorboards and check what's underneath.
As one serial acquirer puts it: "This is the moment where you discover whether you're buying a solid operating business or a house of cards with good marketing."
For SMB acquisitions specifically, this matters even more than in large corporate deals because:
Information is messier and less standardised
Owner-operators hold critical knowledge in their heads
Risks are concentrated rather than diversified
There's often no internal finance team to produce clean data
The real due diligence, of course, begins the moment the SPA ink is dry and you actually own the company. But the pre-completion process is your chance to reduce the number of unpleasant surprises waiting on the other side.
The Three "Big Boy Pants" Moments
Experienced acquirers describe three points in a deal where things get genuinely serious:
Moment One: Signing the Heads of Terms. The handshake is done. You've got the countersigned HOT back and it's "game on." Still non-binding, but you're committed in every practical sense.
Moment Two: The VDR Opens. Now you're managing the share purchase agreement flying back and forth in redline while simultaneously trying to make sense of a sea of documentation. The clock is running, the meter is ticking, and you're working against time to determine whether this is as good an idea as you thought it was.
Moment Three: Day One. You walk into a room full of people and say "here's what's happened, I'm here for your future, we're wedded together now." It's much easier to do this from a position of confidence and knowledge than when you're filled with trepidation about what you might have missed.
Due diligence is fundamentally about preparing for Moment Three by making Moment Two as thorough as time and money allow.
Where to Focus Your Time
Not all diligence is equal, especially at the smaller end of the market. Here's what consistently surfaces real risk.
Financial Due Diligence
This is where most buyers focus, rightly so. But good financial diligence goes well beyond checking historic profits.
Quality of Earnings is the critical concept here. You're looking for:
Whether revenues are sustainable or artificially inflated pre-sale
Whether costs are properly allocated or hidden below the line
Whether cash flow actually matches reported profitability
One common manipulation to watch for is pulled-forward revenue - future services sold upfront and booked as current income without recognising the liability. On paper, the business looks strong. In reality, you're buying future work that's already been paid for.
This is why a strategic accountant, not just a bookkeeper, is essential. You need someone who can get into Xero or QuickBooks or Sage and tell you what's happening beyond the P&L, whether there are serious ongoing calls on cash at the balance sheet level that could undermine your ability to serve working capital.
The sustainability and durability of earnings is what you're really testing. Can you spot an artificial surge in demand if you unpick customer behaviours? Did one customer suddenly spend five times their usual amount in the year before the sale because they were sold four years' worth of service upfront, without that revenue being held as a liability? These are the bullets a proper QoE helps you dodge.
People and Organisational Risk
In SMBs, people are the business. This is often underestimated.
Request anonymised, GDPR-compliant data showing:
Roles and salaries
Tenure in each role
Organisational chart with reporting lines
You're looking for several things here. First, you're calculating your potential redundancy liability, length of service matters. Second, you're checking whether the org chart actually makes sense. Are responsibilities clear or are there duplicated efforts? Is this a structured team or a collection of headless chickens?
The relationship between key personnel and critical customers or suppliers is also important. If the owner has a personal relationship with your top customer, and that relationship is the only real tie between the businesses, what happens when the owner exits?
Ask the seller directly: "How long have you known these people? Do they invite you to their house?" You want strong commercial relationships between the businesses themselves, not just between individuals.
Customer and Supplier Concentration
This is one of the fastest ways to lose sleep post-deal.
Ask for an anonymised breakdown of the top 10 customers at minimum, ideally the top 50 if the business has diversified revenue. What you're looking for:
Does any single customer account for 20-30%+ of revenue?
Can any single supplier choke the business overnight?
Are there change-of-control clauses in key contracts?
If one customer represents a quarter of the business and their contract has a change-of-control provision allowing them to explore options when ownership changes, you've got structural risk that needs addressing.
Similarly on the supply side: does the seller have a panel of backup suppliers, or are you dependent on a single vendor who could hold you to ransom?
Legal Due Diligence
This is where the gremlins hide. Legal diligence surfaces latent liabilities that only trigger after ownership changes.
Common problem areas include:
Customer or supplier contracts with change-of-control clauses
Property leases with hidden break clauses
Employment contracts creating unexpected redundancy exposure
Pending litigation or compliance issues
One acquirer recounts buying a business only to receive a compulsory purchase order from the council on day one, the building they'd occupied for nearly a hundred years was being redeveloped. Rare, yes. But exactly the kind of risk legal diligence exists to surface.
You could even have someone review local authority plans for earmarked development sites near your target's premises. The cost of a proper legal review is far less than the cost of an unexpected relocation in your first week.
IP, Brand, and Asset Ownership
This sounds obvious but is often messy in founder-led businesses.
Verify that:
IP is owned by the company, not the individual
Domains, trademarks, and software licences will transfer cleanly
Certifications and accreditations are current (not lapsed)
It's painful and unnecessary to untangle these issues post-completion when the seller is "in the wind or in Barbados" and you need them to log into their GoDaddy account. Get all of this sorted before the deal closes.
The Biggest Red Flag: Evasion
Not every issue is a deal-breaker. Some risks can be priced in or structured around. But one signal deserves serious attention above all others: evasion.
If a seller:
Avoids providing requested documents
Deflects with vague explanations
Becomes defensive when inconsistencies are raised
You're no longer just assessing a business. You're assessing integrity.
You could distil all of due diligence down to a test of the seller's integrity. Can you trust these people? If transparency breaks down when you start asking hard questions, you might be dealing with someone passing you a "hospital pass"—handing you the ball just as you're about to get pummelled.
The mature approach when something concerning emerges is to have an adult conversation. Sit down, level with the seller: "Our due diligence has discovered this. Can you tell me more about why that might be?" Don't castigate, just dig deeper. It will either lead to the relationship breaking down, or to transparency.
And if transparency comes through resignation, "okay, the gig is up, here's the real deal", that's actually a potential opportunity to renegotiate. Provided it's not a fundamental deal-breaker.
Preventing Deal Fatigue
Time kills deals. Due diligence can drag for months if left unchecked, draining energy, trust, and focus on both sides.
Experienced acquirers do three things to prevent this:
Set milestones early. Agree target dates for VDR population, first-round questions, and SPA drafts. These can move, but having them keeps everyone aligned.
Agree materiality thresholds with your team. Your lawyers will look for everything. Your accountants will look for everything. Let them find things, but decide upfront what level of cumulative risk would actually jeopardise the deal. If issues add up to 3% impact on deal value, maybe deal with them later. If they add up to a third of deal value, it's probably time to walk.
Communicate frequently. Schedule regular calls with both sides, fortnightly initially, then weekly, then twice-weekly as you approach completion. Run them like standups: what's been achieved, what are the blockers, what needs resolving.
The goal is reducing uncertainty, not creating paralysis.
What Happens When Issues Emerge
Once risks are identified through diligence, you have three options:
Walk away
Renegotiate price
Restructure the deal
Earn-outs are a common tool for the third option. They allow risk to be shared rather than fully transferred. A fair earn-out tests whether the seller truly believes in the future performance they've described.
Don't ask them to double the business to get their earn-out, that's unreasonable. But asking that the business performs at 95-100% of last year's level? That's fair. And if the seller truly believes what they've told you throughout this process, they should take some of that risk on.
If they won't, that tells you something too.
The Bottom Line
No acquisition is risk-free. Expecting airtight certainty is naive.
Good due diligence doesn't eliminate risk, it turns unknowns into knowns. It gives you the confidence to step into ownership without constantly wondering what you missed.
You need a bit of a war chest, or at least some headroom in the working capital of the business you're acquiring, to weather inevitable storms. But with thorough preparation, you can take the punches as they come rather than being blindsided by problems that were there all along.
More deals fail in diligence due to lack of preparation than fatal flaws. Done properly, diligence is not a barrier. It's a bridge.
This article draws on insights from Episode 6 of The M&A Zing, a podcast for acquisition entrepreneurs in the UK and Europe. Listen to the full episode here.
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