Due Diligence After LOI: The First 7 Days That Prevent Post-Close Surprises

Avoid expensive post-close surprises by mastering the first seven days after signing an LOI.

In this episode of Entry & Exit, hosts Stephen Olmon and Collin Trimble deliver a brutally practical due diligence playbook for buying a security or life-safety business. Drawing from real acquisitions, they break down exactly how to run diligence without chaos—and why skipping steps almost always shows up later as lost revenue, integration pain, or legal risk.
This episode walks through a real-world due diligence checklist, focusing on what to request immediately, where buyers most often get blindsided, and how to protect yourself before money changes hands.
What You’ll Learn

The Week 1 Protocol: The specific diligence requests you must make immediately to uncover key-person risk and owner dependency
Financial Deep Dive: Why quality of earnings analysis and RMR audits are non-negotiable in security and alarm acquisitions

Legal Pitfalls: Purchase agreement strategy (Asset Purchase vs. Stock Sale), assignability issues, and spotting “tribal knowledge” gaps
Risk Management: How customer concentration and undocumented arrangements should impact deal structure and walk-away thresholds
Whether you’re evaluating acquisition due diligence for a small alarm company or a multi-branch integrator, this episode breaks down the real cost of rushing diligence—and how disciplined buyers avoid it.

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Stephen Olmon

Collin Trimble

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Chapters

• 0:00 Intro: The First 7 Days After LOI
• 5:00 Understanding Team Dynamics & Tribal Knowledge
• 7:23 Key Person Risk & Owner Dependency
• 25:11 Contracts, Legal Risks & Assignability
• 32:47 Purchase Agreements: Stock Sale vs. Asset Purchase
• 37:31 Customer Concentration & Walk-Away Thresholds

Transcript

EE Episode 12

[00:00:00] The first thing to decide is, am I doing this or is someone else doing this that I'm going to kind of coordinate or quarterback with? 

There has not been a deal yet that we have done where we said, man, we overdid it with due diligence. But there have been many times where we have done a deal and said, man, we really should have paid.

To look at that. 

I'm wanting to understand reality of the owner. Like what are they really doing? Like talk me through 

a week. You are going to find inherently some surprises, things that are good and some things that are bad, that are not gonna be beneficial for you. 

You buy a deal if you don't protect yourself and structure around that.

Ouch.

Welcome to Entry and Exit. My name is Steven Oman. This is Colin Trimble, my business partner and co-host. And on entry and exit, we aim to provide tactical and practical advice to the security and life safety industry. 

Welcome back. [00:01:00] So we are continuing, continuing with the theme of m and. And we're gonna spend most of our time, almost all of our time today on due diligence and things you want to be looking out for, particularly requests and items that you want to consider in that very first week of getting under LOI, um, you need to be thinking about.

How long some of these tasks will take. You know, obviously whenever you're buying a business, most of the time the sellers are also involved in the business. So some of these tasks take a little longer to provide information. So you wanna get out ahead, get that request list in as quick as possible. And so we're gonna go through a couple sections here of things, but just from doing, you know, we've done seven deals here in the, in the last three years, and some of the things that we wish we would've known early, uh, on where, you know, where should we.

Put these in priority from requests. There's hundreds of things you're gonna wanna review. We think these are the the first ones you [00:02:00] should submit, uh, in that request list. So we're gonna get started. Steven, what's the very first thing, uh, in your mind, in no particular order, but what's the very first thing that pops into your mind of something we should submit to the sellers of a business when we wanna buy in that first seven days?

Yeah, so I actually wouldn't start with the list. I would start with MI or our team. Going to execute all of this diligence ourselves. Um, or are we going to partner with some sort of vendor and that could be a due diligence vendor. A lot of like CPA firms, things like that will offer some sort of service like that.

I would encourage you to work with a industry specific due diligence provider if you are going to use a provider like that, especially if it's heavily focused on RMR. Um, if you go up market in transaction size, and you're probably talking about doing a quality of earnings on top of any sort of RMR audit or, or things like that.

Um, so [00:03:00] really the, the first thing to decide is. Am I doing this or is someone else doing this that I'm going to kind of coordinate or quarterback with? So that's the, the first thing. And if you actually have the luxury of, and the time and the the knowledge base to do it. On your own. I think that's great.

Um, you will be very intimately familiar with that business and those accounts and, and things before you ever own them. Wonderful. Most people. Are quite busy, right? And you have an existing operation that's pulling you in different directions. We know that very well. That's the first key decision and, and generally speaking, I would encourage you to budget as a part of the deal to budget in professional help, right?

You know, you shouldn't write a contract on your own, in my opinion. Let's work with, you know, qualified attorneys. Same thing on the diligence side. 

Yeah, that's a really important point to call out. We, [00:04:00] uh, have done many deals and we have done varying degrees of due diligence on each of those deals. In terms of paying a third party provider, I would say there has not been a deal yet that we have done where we said, man, you know, we overdid it with due diligence on that deal.

Uh, next time we're gonna do less. But there have been many times where we have done a deal and said, man. We really should have paid somebody to look at that. Uh, you know, contract samples would be an example of that. So, um, yeah, I think that's a really important distinction. We'll get there. So, yeah.

Important to make the decision. Are you gonna hire somebody to help you out with this or not? Let's assume that you are gonna, uh, hire somebody, but you're in that first seven days and you really want to get a couple items over to the sellers of things that you really want to evaluate. Um, what would be one of the first things that you request?

Uh, one of the first things is understanding their team. So who do they have? Like some organizations run really thin. [00:05:00] Others are maybe overstaffed or, you know, what we'll see is people that have been there a really long time, you know, the owners, it's like, it's like we're a big family and so they don't want to let someone go.

Yeah. That maybe only does 15 hours of work a week and they, everybody knows it. So yeah, we see that quite a bit. Right? Um, and then beyond that, it's what's a job title versus what are they actually doing? Um, and so what are the actual responsibilities of those different roles? What's the tech mix? You know, what are their actual skill sets?

What's the work they're doing? A lot of licenses, things like that, like to get familiar with it. Um, and then also, um, compensation. For those different people. Sometimes you may see that people are being under or overpaid per like kind of market rates quite a bit, and I wanna understand that. I want to get out in front of it.

And then another thing that I want to think about is sales [00:06:00] specifically. So where are sales coming from? Is the owner, is it owner led sales or do they have some sort of sales team? What does that structure look like as we always talk about where's the, you know, kind of predictable revenue next dollar coming from.

So those are some of the different things on the team that I'm wanting to, if I haven't already learned prior to an LOI being signed, I'm wanting to kind of quickly get caught up on that in the first week because that's also going to frame out the way that I'm thinking about this entire transaction.

Yeah, I agree with a lot of that. I think one of the first things that you brought up, or was that, hey, we wanna look at salary amounts for key roles. Um. You are going to find a lot of times that the sellers of a business, traditionally, in their final years of wanting to operate that business, are not gonna be super motivated to raise the salaries of employees.

And so they will usually [00:07:00] represent, um, something well below market. And just quick tip, if you're asking, um. If you're working with a seller and you're gonna buy a business, you're talking about the team. One thing you may wanna ask is, have any of your employees asked for a raise in the last six months?

That you have not given to them, you may even go back 12 months because we did that without even really knowing on our first acquisition of ALARM Masters and turned out there was a lot of people that wanted raises and he was honest about that. There was a few people that he had left off his list, um, but he was honest about the people that had wanted a raise.

And we have bought multiple businesses where the staff was really underpaid and so they wanted to increase their. Uh, salary and that's a hard thing to do immediately, especially before you even really know what they're capable of. Um, so it's really important to get ahead of that. Another thing which we're about to kind of jump into here, is key man risk.

Key man risk doesn't [00:08:00] always exist, uh, with the key man. Um, key man risk can happen with employees, particularly salespeople or operational people. Um, most organizations are gonna have an operations person, whether that's a technician or operations manager or you know, whatever. That, uh, has insanely key relationships with customers and.

Has a lot of tribal knowledge that runs through them, or it's a, it's like, hey, if this person goes on vacation for a week, the whole thing, the wheels just come off. Yeah. You just, there's gonna be some of that in every business, especially if you're sub million dollars of ebitda. That's just the way it is.

Um. 'cause most businesses below that are pretty thin. But you need to just be aware of that. Um, so that when they come to you in the first 30 days of you owning the business, they say, Hey, can I take a week of vacation? You're not trying to be a jerk. You say yes. You need to know what you are about to encounter.

So, um, since we're trying to talk about key risk, Stephen, can you talk us through, uh, requests are things that you would want to [00:09:00] consider from the seller to identify some of that key man risk early in the due diligence process. Uh, so you can try to get ahead of it. 

What we see a lot are owners, especially, you know, down market that have three different jobs.

So that's, that's one thing, is not only understanding the job roles and what's written down and the titles and what they tell you, but as you dig, you know what, what I've seen a lot is that, and, and these are businesses that can do three, four, $5 million a year. Top line where the owner is leading the business.

They are doing things administratively that are well below their pay grade, but they feel like. I'm the person that needs to be doing this. Mm-hmm. Even some owners that are running like payroll themselves, they also are leading sales and oh, by the way, they're also doing all of their quoting or estimation and they might even be overseeing certain key projects.

You know, it's a very spread thin, even though the [00:10:00] business is not small, inherently it's a decent sized business. So, um, I'm wanting to understand reality of. The owner, like what are they really doing? Like talk me through a week in. Kind of in your life, like what is business as usual look like for you?

And one of the key signals of this is when owners are just like, man, I'm exhausted. Yeah. Like, I am just, honestly, I'm burned out. I'm kind of worn thin because I'm doing so many different things and, and this is the thing we hear a lot is especially, there's two different things we hear. It's either guys that have come from.

Or gals that have come from more of a sales background or more of a technical background, and they want to do what they enjoy, right? So it's like, man, I wish I could just sell and not have to do all this other stuff. Right? We hear things like that. So you want to press in? To that topic specifically to understand the risk you have.

Because what's likely is let's, even, there's some [00:11:00] sort of transition services agreement. They're gonna be around for three, six, even 12 months, something like that. Eventually you're going to realize you have massive gaps on the team. So, um, that's, that's one topic within this from a key man risk and even the, the seller specifically.

Um. You know, key relationships, key information, what's written down like mm-hmm. Do we have a CRM do, which we've talked a lot about, like what data do we have and how much lives purely in the owner's mind, or like you said, in the mind of maybe like an operations manager, been there 13 years, knows where all the skeletons are buried, you know, knows the, the clients intimately.

Typically there's one, two, or three people that have an incredible wealth of information, not written down, not even in a spreadsheet. It just lives in their mind. 

Yeah, I totally agree. I think, uh, coming from a sales [00:12:00] guy perspective, uh, the other thing I would want to know is do you have any relationships with customers or that the answer's probably gonna be yes.

What of your customer relationships do they run all of their sales cycles through you, even if you have a sales team? Um, because a lot of times. The owner has a very specific relationship where they have tried to hand this off. This is actually a, a, a big yellow flag if they have a sales team. So if you're buying a company that has a salesperson or sales team and the owner is still managing, uh, specific.

Customer relationships from a sales perspective, not just from like a, I'm an owner customer service perspective, but a sales perspective. You need to really understand that because what that means is that owner has tried to hand that off to his salesperson, likely it did not go well, and so he's managing it going forward.

So that's risk, and you just have to decide the owner is going to downplay it usually. Mm-hmm. And you just have to kinda work through that and understand that [00:13:00] relationship. Um, so I would say key, key matters associated with deal flow is really important, especially in this industry where you've got relationships with big customers, developers, general contractors, um.

We looked at a deal that had a guy that had a relationship with multiple developers, you know, and it was like five to seven developers. And he'd been working with him for 35 years. And he said to us, you know, well, we'll, we'll never, these developers will never work with anybody else but me. And I'm like, dude, that's actually, I don't know if that's, I don't think you should tell me that.

Like, that kind of scares me a little bit. 

Yeah. 

Um. So there's a lot that goes into key man risk that you want to do. We're gonna talk about more about customer concentration here in a little bit. Um, but that is something that kind of flows through the key man risk. Um, the key man risk. So before we move on from that, Steven, any other items and key man risk before we move on to the next bullet point, which is gonna be a broader concept.

You know, there's other lower level key man or [00:14:00] key woman risk in the org. Like, think about. Dispatch or, um, sometimes even like that one extremely talented tech mm-hmm. Who is like a do it all Swiss army knife and the seller has kind of maybe taken advantage of that person or just relied so heavily on this like one tech.

Um, especially on smaller deals. Um, so those are a few other things that we see as kind of like gotchas. 

Yeah, I completely agree. Um, I completely agree. Um, another thing that I, I wanna kind of talk through is, and this flows perfectly into our next bullet point, is, um. When you look at, especially if there's RMR in the business, and a lot of times businesses have special arrangements with their customers as it relates to RMR.

Like, Hey, we're gonna, we're gonna package all of these. It could be as simple as we're gonna package all these locations under this one. Well then that's really confusing 'cause maybe those other [00:15:00] locations don't have an account and only the owner knows that 'cause he's the one billing. So there's, there's that kind of.

I'm gonna say tribal knowledge all the way up to, um, we had, when we bought ALARM Masters, we had several customers that said, Hey, uh, I don't pay my RMR bill because I exchange, I own a tire shop and I exchange tires for my monitoring service. So you can pick up your tires now. Um, in exchange for my bill and that was obviously not something that we were aware of and luckily didn't represent a large portion of our recurring revenue.

But, um, we know we had to basically delicately say, we're good on tires, um, you know, gonna need you to pay this, or whatever. And so those are just some things that you think about when you're looking at RMR of like. Hey, the owner probably has some information 'cause he is likely got longstanding relationships that you should be aware of.

So that kind of brings us into our next point, which is doing an RMR audit. If this is an RMR heavy business, I would say [00:16:00] anything above $15,000, Steven, you may have a different opinion on that. Uh, you need to do an RMR audit and that's gonna take at least 60 days probably. Uh, you could do a abbreviated version in 30 days.

You gotta get that, those requests in. Kind of in that first seven days. Steven, give us some, some color on RMR audit. Why is it important? What does it look like? What's that process feel like? 

It is so critical to understand what typically exists and a difference between what a seller thinks their RMR is and what their actual qualified RMR that is really, uh, appropriate to purchase.

And I don't think that we've gone through a transaction. Where a seller set a number, and that's actually exactly what it was. Yeah. Typically there's, oh, I forgot about that. Or, oh, my billing system, this, that, or the other. Um, you know, and, and we'll get into this in a moment, but I mean, [00:17:00] just. I, I see. I've got this special spreadsheet I've got, I've got the software platform, but you know, we didn't really use it a lot two years ago, so there's some kind of data that didn't really ever get added in from 2023.

Yeah. Or something, you know, something like that. Yeah. Billing system, central Station, I mean, all of it together. There are typically. Differences in all of those different elements. And so there's, there's work to be done to kind of tie it together to understand what's missing, to try to drive to, what is that actual number that we are going, especially in an RMR based deal, from a valuation perspective that we're offering on that multiple.

What is that number? Um, so it's critical so that we get. Our, uh, underwriting and our valuation. Correct. It's critical for your kind of future plans as you're thinking about kind of proforma the future of your business and like, what are those actual numbers? Integration. [00:18:00] Integration, yes. All, all of that, um, is kind of derived from this understanding and so I think if you take it really seriously, I definitely didn't appreciate.

Early on, the depth you had to go to to get that accurate data and to try to, um, kinda unify it, if you will. Um hmm. And so you obviously wanna know what's the total. Like very simply. Mm-hmm. Um, what is the total full, total, like qualified RMR and verifying that against billing records? Um, and uh, from there, you know, you're getting into different types.

Like, I'm wanting to look at segments like, you know, we would look at maybe how much is berg versus fire versus access control or something like that. You know, like we're looking at different, um, service lines. Um, another thing that. You'll, um, you'll run into is some people from an RMR perspective, they are lumping in if they have contracted [00:19:00] inspection revenue.

Yeah. And so you, you want, typically you're gonna value those different items. Uh, those can be different values or different multiples, especially if it's of any real size, um, on the inspection side that's contracted. So it's just all about really understanding what am I actually paying for and. Is what the seller representing true.

And a lot of times it's not. Um, you know, it's not that they're. Intentionally misrepresenting something mis Yeah, they don't know. Yeah. Um, and, or, or there's just old data and there's a lot of times it's a data issue, um, that they did some software change years ago or that person left who was super organized and since, since she left, you know, things haven't really been as buttoned up and all sorts of things like that.

So that's. That's kind of where my, uh, you know, attrition. That's a huge one. Mm-hmm. Um, [00:20:00] we're typically looking for single digit attrition as a standard. Yeah. Really. Seven, five to 7% and below, like mm-hmm. We're, we feel very comfortable with that. If you're pushing 8, 9, 10, 11, 12%. We're starting to look at that harder.

Um, and we understand, we wanna understand why, like what are the attrition reasons? Are these due to business closures or home moves, or is there more of a pattern there, especially in the last year or two? So those are, those are some things that I'm quickly wanting to try to learn about early on in the due diligence process.

Yeah, it speak, going back to your very first point about outsourcing, if this is your first deal, and especially if it's based on an RMR valuation. Don't skip the art, like you need to get somebody to do it for you. Um, you may be an industry vet. And, and have way more years of experience than we do. But everybody we've talked to in our industry has said, man, I wish I would've done that.

I I don't make that mistake again. And you're gonna wince when it's six or $7,000, whatever to do this RMR audit. You need to do [00:21:00] it. Um, and just so for the folks that don't know, like what they're gonna look at is they're gonna look at the vendor bill that's coming in. Can they see the customer's account coming from that vendor bill?

They're gonna look at the contract and they're gonna look at the billing system. They wanna see some continuity there. They wanna see some tie together there. And it's common for folks not to have contracts. So it's, that's, uh, there's some, you know, kind of degrees of freedom in there. But if you see somebody that's in the monitoring center, let's just say, and you're getting charged 10 bucks a month or whatever for cellular monitoring, interactive, but there's no, nothing in the, um, in the billing system.

Then you really wanna identify what that is, especially before you close. So it's not just a valuation thing, it's also an operational thing to uncover some of this bad data and get answers to it before you close. Um, and a lot of times they go, oh yeah, I forgot about that one. Yeah, we're actually billing that one under this guy.

It's his house, so we're giving it for free or whatever. So I think that that's really important. [00:22:00] Um. I think that taking a look at the contracts and making sure that they have initials in all the right places, dates they're signed, uh, one mistake we made early on is we did a, uh, a due diligence and we did a sampling of the contracts.

So we wanted to see how the, the point was just to see how many of the customers had completed contracts. So we, you know, there was thousands of customers. I think we did a sample of even a hundred, 200 of 'em total. It, it came back looking a little low but reasonable. And so we're like, okay, we're good to move forward.

And then we ended up, you know, looking at the broader thing after we closed and it was a mess. There was very little contracts and it was tough and we had to go out and do a big push to get contracts for those customers. And, um, so don't skip out. On that Arm R audit, you are not gonna finish that in the first seven days.

You're probably not even gonna finish it in the first 45 days, but because it's gonna take time, you need to get the ball rolling early and, and identify who you're gonna work with. Get that request list, educate the [00:23:00] seller on what that process is gonna look like, uh, because that, that it is gonna involve some, some information from them.

And, and I would just say like. You will value the information you get outta this once you integrate. Because doing due diligence is not the hard part of an m and a transaction if you're, it's either the integration of bringing it into your business or it's the take it if you're buying a platform or this is your first business, it's trying to figure out what the heck is going on.

And especially when that seller is, you know, it's day 90 and they're out and you know, they're not motivated to answer their phone anymore. You know, you, you wanna get those kind of gotchas before they close, 

right? Yeah. There's, there's pain on either side. You pick, I, I'd rather have the pain on the front end before we close, whether I see view that pain as effort and time and energy or cost or, or both end.

Mm-hmm. Let's, let's experience and pain them because it'll, it's more painful after the fact, you know, if [00:24:00] you're trying to play catch up. And then the other thing I just want to stop and say is. These are not all things that you're going to get back in the first seven days. These are things that you're going to be requesting in the first seven days.

Mm-hmm. You know, think of it as kind of a due diligence playbook, you know, that, that we're advocating for. You might get some of these items more quickly. You know, one of the other things that we haven't talked about is oftentimes in these cycles that stretch out a few months, you've. You haven't gotten fresh financials in a bit, so maybe you saw some sort of sim or, uh, original kind of, uh, data on the opportunity you pursued it.

But you might not have gotten updated financials along the way. Some people are more willing to provide that than others. And so then one of the other items you need to be requesting, if you haven't gotten it in first seven days is, Hey, I'd like to get updated balance sheet, you know, year to date, p and ls, you know, that sort of thing so that you can make sure, oh, sneak me.

Did, did we just have like [00:25:00] a big drop in the last 60 days, 90 days, something like that. And we've seen that happen before. And so that's another item. Uh, that's. Pretty critical that you should be able to get more quickly in that first kind of couple weeks, um, yeah. To make sure the things are trending as you'd expect.

Yep. A hundred percent. Getting the financials is important and understanding are these cash financials, are these accrual financials? If you can get both, that's. That's clutch. WIP is really important. Pipeline's important. These are, I mean, there's, our list of due diligence items is really long. If you, if you want to get, um, a sample of that list or whatever and you have questions like, hit us up, we we're happy to talk you through it.

Um, I wanna, I wanna, we, we, we kind of ended there on contracts for a second. I don't wanna spend a ton of time on this, but. What are some things that you like if you're buying a business that has RMR specific, uh, terms or limits of liability or autorenew or whatever that people need to be looking at when they're evaluating contract samples from the [00:26:00] seller?

Yeah, so the first thing is how many different contract versions do they have? Hmm, good point. So sometimes you'll have one version and it's what they've used for the last 26 years. Yeah, and probably an industry attorney that's well respected. Maybe starts with the letter K, I don't know. Um, who knows? Um, they, they've been using, that's great.

Um, if they have been inquisitive, then what you'll likely see is that they have their base contract plus, mm-hmm. Contract versions that they never updated or pushed through, you know, with those acquired accounts. So then you've got that, and then on top of that. Some people have different types of contracts for different services and they split those out.

It's not all unified, so you could look at a deal that's not even that big. Let's say it's 1.5, 2.5 million top line that's got 6, 7, 8 different types of contracts [00:27:00] out in the wild, potentially very common. So that is, that is probably the norm. I would say it, it's really almost binary. It's either that or one is what I, yeah, what I see a lot.

Um, so that's, uh, I'm wanting to get my arms around that, and then I'm wanting to kind of march through those templates and understand the differences between them. What gaps they have, you know? Um, any, any concerns or kind of major missing items that some of those versions, especially the older they are, they may not have as kind of modern, um.

You know, uh, elements of a contract that would protect you. Yeah. So, uh, you know, ideally, you know, this industry, you kind of mature and get more and more sophisticated and learned through error and pain. And, and so then if those contracts, it's the same contract that's been used for 30 years, I guarantee you there's probably [00:28:00] some issues.

With them. Yep. And it doesn't mean that you don't do the deal or that you try to reprice it or retrade it. It means that you're now aware of your own legal risk and um, just kind of. Work the problem, you know? Yeah. So on top of that, there are, what we'll see is that there'll be like these random service agreements, you know, like these one-off things, like, oh yeah, I have these two customers that have, uh, you know, they, they never pay for service.

They, they pay, they kind of this different sort of contract and they pay it annually. And, you know, typically these are. Bad deals, kind of a cash grab where they wanted to try to make something easy, but it ends up actually being a really bad contract for, for you to take on. Yep. And it's, oh, I've known this customer since I was five and, you know, whatever it may be.

Um, so there are, there are [00:29:00] typically these other random one-off contracts out in the wild. Yeah. So I really encourage you to. Make a point of it with the seller. Do you have any other types of contracts? Not just um, monitoring agreements or things like that, but any other type of legal contract? Mm-hmm. Um, and, and.

Are you MSAs with 

contractors? 

Yeah. Are, that's a good one. But also, are you doing any work on a, on a regular basis that people expect of you that that doesn't actually have any paper behind it? Right. 'cause there's typically verbal agreements out there as well if people have been around for 10, 20 plus years.

Along with that, there's, there's a lot of key terms you're gonna wanna look. If, if you're, if you're doing a deal that's brokered, um, almost certainly the sim is gonna have these key terms. There's gonna be check boxes next to 'em. Things like, uh, is the agreement have an autorenew clause. Is the, uh, is the contract have, uh, the industry standard limits of [00:30:00] liability?

Do they have cancellation terms in them? Do they have most importantly assignability language in them to allow you to assign those contracts, which means you can buy that business on an a PA. Um, and, and I think that's just all really important, like terms that you're gonna wanna look at. If you're not gonna pay for an industry attorney to do your purchase agreement, which we're actually gonna talk about next.

You should have an industry attorney look at. Their agreement sample to give you some feedback. A due diligence provider can kind of do that if they're really good. But man, I'd pay a thousand bucks and have an attorney look at it, especially the first time I'm doing a deal because there's stuff in there that like, we almost bought a deal that didn't have assignment language, and that would've been a huge Gotcha.

'cause we were gonna do it on an a PA and we wouldn't have been able to legally take over those contracts. So. Um, just making sure you're looking through all that is really important. 

I, I, I will dig my heels in and say, spend money for professional help. Yeah. Yeah. I mean, that's, [00:31:00] that's my strong opinion, whether it is due diligence or legal.

I really encourage you to budget those costs into the entirety of the deal and to think about it holistically. Mm-hmm. At the transaction level, because I don't think saving the five, 10, $15,000 is worth it. Very rarely. Is it worthwhile? And I can think of three or four different times in my business career where I kick myself for not just spending the extra few grand to do it the right way and to make sure that I had smarter people than myself.

Mm-hmm. Um, you know, giving, you know, whatever we were doing, kind of their, their blessing and their thumbs up. 

In particular, if it's a, if it's a cash deal, right? If you're doing some type of like heavily seller financed deal or some kind of very special financing arrangement, you still wanna do some amount of due diligence.

You may not do as [00:32:00] much as we're recommending on this episode, and that's really like a separate type of due diligence process. And it's gonna be fully dependent on what your deal structure looks like. But yeah, if you're doing a majority cash deal where you know 50% or more of it is done on cash, like.

You gotta, you gotta do the due diligence. So, um, I wanna jump in with kind of two more bullets that I think are really important to, to figure out in that first seven days. The next one has to do with the purchase agreement and figuring out, um. Are you gonna do a stock sale? Are you gonna do an a PA, Steven?

Explain. Some people don't know. What's the difference between a stock sale and an a PA? Will you start there and then kind of jump into why it's important and what you may want to try to deliver, uh, or work on in the first seven days related to a purchase agreement? 

Yeah, you're, you're not going to generate a purchase agreement.

Maybe you have some sort of template or something you've used in the past. It's not that you're trying to get the seller. A purchase agreement in the first week, but you wanna have Right, your purchase agreement plan in place. [00:33:00] Uh, that's right. Really even before an LOI gets signed. You ideally, yeah. Have the transaction type all kind of, um, dialed in and that you have alignment between, you know, buyer and seller on that.

So. An a PA asset purchase agreement. You are buying specific assets, um, from the business and those assets are now becoming assets that your current entity owns. Um, a stock sale is you are buying the entirety of their entity and. There are, uh, tax benefits to a seller. Um, typically in that scenario, um, there are a variety of tax and kind of financial implications on, on doing a stock sale, and I won't get.

Too nerdy right now on, um, some different paths related to stock sales that you can pursue, um, that end up having to do with tax treatment and, uh, flows of dollars between [00:34:00] entities in the future and all that good stuff. Yep. But all that to say, um, let's say you don't have assignment language. In those contracts.

But you believe this is like an amazing acquisition, like one way you could solve for that it, I don't want to oversimplify, but you would be going down a path of a stock sale. Another thing is if the entity has nons assignable or transferable contracts or partnerships or vendor manufacturer relationships, something like that, that are tied to the entity.

And it, it is not something that is transferable, assignable, et cetera. Um mm-hmm. If, if they are so strategic and so key to that acquisition, then you might be thinking about a stock sale. Um, yeah. We, we see both. We've done both. Um, and some people treat stock sales, like buyers will speak very, very poorly of stock sales.

Mm-hmm. I don't think that. You need to necessarily think a [00:35:00] PA good stock sale bad? Um, I don't, I don't think it's that simple, but I would say that a stock sale brings more risk to you in the form of liability. And so, um, there are ways to, uh, try to. Protect yourself along those lines. But ultimately you are taking over an entity and they may have done something wrong three years ago that hasn't bubbled up yet, and who's responsible for that?

And the finger pointing, it's like the Spider-Man meme, while they're all pointing at each other, you know, you might, you might get into that type of scenario. So you have to be really thoughtful and typically due diligence takes longer in a stock sale because of that. 

Um, I wanna move to customer concentration, but before I do, uh, a couple things that are important to talk about in the first, you may even try to do it before you close, would be like, is there gonna be a working capital peg that's involved in this?

And if that wasn't outlined in the LOI, um. When is it [00:36:00] gonna be outlined? And is the customer aware of what a working capital peg is? Or, sorry, not the customer, the seller. And then the other thing you may wanna look back is, uh, is is there a non-compete or non-solicitation in this deal? You're gonna wanna make sure you have those base level terms hammered out with the seller.

Um, and then if you can just. It is harder on your first deal, but on your second, third, fourth, fifth, whatever deal, getting some reps and warranties language in front of their attorney as quick as possible is really good. We've had deals almost fall apart over. Um, the purchase agreement before, and it was never over valuation.

We had already hammered that out and we were all aligned, but it was over the language. The language, and the, um, I'll tell you what we've had, we've had lawyers of sellers almost kill deals where it's been like they're asking for things that are so one-sided and non-standard that it's classic it, that everyone was happy, like the, everyone was happy with, uh, everything and they got bad advice and, um, you just.

[00:37:00] You, it's hard to get out in front of that except for to introduce the language early and explain it and deliver high levels of communication. 

So my, my favorite, my favorite example of that was a seller in their seventies who was adamantly like retiring, but the seller's attorney wanted their non-compete to be three years.

Oh yeah. And it was like, yeah. They're moving on my guy. Yeah. Yeah. Anyways. 

Almost blew up the deal. It was tough. Yeah, it is. Silly customer concentration list. Just give us a couple bullet points on that. Just help us close out on that. Help us think about customer concentration. How, what would you look at?

What reports would you request? Why does it matter? 

Yep. So I right off the top, wanna know. If any of their customers make up more than 5% of their annual revenue, something like that. Yeah. It's kind of a marker. Um, if the, the larger [00:38:00] a businesses, the lower the percentage. It becomes the concern. So, mm-hmm. If a business is doing a hundred million dollars a year, which if you are congrats.

Mm-hmm. Um, yeah. Well, three 4% is from an absolute dollar volume, three or $4 million, like at that level, that still really is material. Whereas if, if a business is doing $1.4 million a year, 3% not as concerned, scale matters. Scale matters. Um, good summary. And uh, so I also want to know, you know. Our, uh, for these larger customers, the revenue concentration, you know, here's something, here's like an example of what we'd see.

There might be one company that makes up 6% and another customer that makes up 11%. Mm-hmm. And maybe another one that makes up. Six, seven, 8%. Right? So you take these two or three customers and now all of a sudden that's 20 to 30% of revenue. Yeah. Well now I really wanna [00:39:00] know a lot about those from what's their contracts, how much time is left on those agreements, you know, things like that because that represents real risk pooled together.

Mm-hmm. So, okay, the largest one's, 11%. I could stomach that, but oh, by the way, there's a couple that are also pretty material. Mm-hmm. And then we've also structured deals, um, with like earnouts tied to. One really large. You know, I, I think back to one deal that we didn't end up doing, but the conversation was there was a 35% re uh, revenue concentration with a single customer.

Mm-hmm. And we, and, and the seller knew they, they were pretty fair about it. They understood that we were likely going to have some sort of earnout specifically tied to mm-hmm. That customer. Mm-hmm. And so you just have to kind of meet that head on. You don't need to be shy about it. Um, because ultimately.

You buy a deal and within a matter of months, 20% of revenue could walk [00:40:00] out the door that you just paid for. Yeah. If you don't protect yourself and structure around that. Ouch. 

In a best case scenario, you would probably wanna look at revenue concentration and uh, based on revenue type. So you'd wanna see top 100 customers buy RMR service and installation.

You're, you're probably for smaller businesses aren't gonna get that 'cause their technology's not gonna support revenue breakout, but they will have RMR at a minimum. So I would look at it at both the, from a frame of reference of top 50 from RMR and top 50 from, um, total customer. Here's another thing that I think is helpful to do.

So, um. You can spend time on this. We do this. Take those top a hundred customers and go down the list and make notes and tell, tell, meet with the seller and say, Hey, what I'm trying to figure out is just any special arrangements or history or anything that comes to your mind related to these top 100.

Anything I need to know? Just, oh, they have a special billing situation. Oh, they have this guy who's involved, he's about to retire. Like whatever. You can tell me. [00:41:00] This is mostly for your integration. Like this is just so you, you can kind of get ahead of that and you, you may even, I mean, you could do this after you close if you really wanted to, but this will definitely expose some risk.

Um, and I think it's just important to kind of get that out in front of the, in front of the seller. Um, and, and the last thing, just, I wanna, I want to go to homework in one second, but the, the last thing I want to just highlight is, um, you are going to find inherently some surprises, things that are good.

That are gonna benefit you and some things that are bad, that are not gonna be beneficial for you. If this is your first deal, uh, there are very few things that you're, if you're gonna try to retrade and try to get a lower price after you go through due diligence, even if you're a hundred percent justified, you're unlikely to get it.

So just adjust your mindset, and that's not that you shouldn't try or you shouldn't bring it up or that you shouldn't talk through it, but just adjust your mindset that when you get into a deal. A seller is going to have their mind pegged on a [00:42:00] particular purchase value, and any dollars away from that you're unlikely to achieve deals will fall apart and you will have no recourse for the due diligence and time that you spent on that deal.

So you need to understand what your tolerance of risk is. If you're going into a deal where you are already razor thin, pushing it from a budget perspective. You're gonna find some surprises. So just know that before you go into the deal. Think about that before you get under LOI. 

Yeah, and you know, you'll hear it a lot.

There's hair on every deal. There's always gonna be some issues you find out about that aren't, um, aren't awesome. You have to push through and you also have to kind of go into deals knowing what would. Be something that would equate to me walking away. Yeah. Because you can't be married to the deal, you can't be emotionally invested in it, like mm-hmm.

You have to be able to walk away from a deal if ultimately it's not gonna serve your go forward. Like Yeah. [00:43:00] If it's gonna actually end up hurting you, you've gotta be able to walk away and you need to kind of know some of those things beforehand. Um, and so, you know, as an example, um, maybe you find out that 75% of the contracts.

That you were thinking about buying aren't signed. That could be an example. 

Yeah. Close this out with some homework. I know this is kind of a tough one because it's like some, not everybody's looking to buy, but if, if you are planning to buy and you're hunting for a deal, what are some things people can do to get, get prepared for that?

Yeah. First thing is build your team, so your team's either gonna be internal or external. And to do all of this well is not one person. That's insanity. You're just volunteering. Yep. For it to go terribly so. Mm-hmm. If you're going to try to tackle this on your own, then you have to kind of build the team internally.

Who on your team, who's going to be able to complete an RMR audit on their own and look through contracts and who has that knowledge and on the financials, and so build your team. If it's external, who are the vendors? We're happy to. Refer, you know, [00:44:00] people that we work with, um, to you if you're interested.

So that's, uh, the first thing. Um, I think the second item is what I was just speaking to, which is know kind of your non-negotiables. So when you get into diligence, if, what are these? Very key things that, or, or not even the non-negotiables, or what are the things that you, based on your own business have the most heartburn around?

Let's attack those. Yeah. Let's know what those are. Um, and find the answers out quickly. Um, super smart. And then, you know, the, the last thing I'd say is, and this goes, you know, like whether you are doing it yourself or not, you're going to be involved. Like, make sure you give yourself enough time. On due diligence.

Mm-hmm. Because sometimes a seller will try to push you and say, this is, we're a simple business and we should be able to do this in 45 days from the time we sign the LOI. Eh, no, get outta here. Like, you need to push back, you need to reset [00:45:00] expectations before you even sign an LOI. Because if that is what they're trying to force you to do, they're not.

Negotiating and, and trying to work with you in a way that's like healthy and realistic, and so mm-hmm. I probably don't even want to get under LOI with someone who's gonna act that way. Yeah. It's, it's a give and take. We've gotta work together, so you need to know the seller and you need to know, like their mindset as it relates to due diligence.

And so if. There's not enough time. You're gonna hurt the, the likelihood of the deal closing. You're gonna hurt your own operating business that you're trying to, you know, yep. Keep running. Um, and you're gonna hurt the relationship between buyer and seller. So that's another, another item. 

Yeah. Those are great.

Yeah, that's really helpful. We're still learning a lot and we'll continue to share more as we do more and more deals. Um, and we're under LOI right now for a couple deals that we're really excited about. So we're excited to share more about that. Uh, if you need help with any of this, you've got questions.

Uh, we talked, and I'm not exaggerating. We talked to listeners every single week [00:46:00] and we really love that. Uh, if you like this content and this is helpful, please like, and subscribe, engage with the videos on YouTube. We really tell your mom appreciate that your mom. We also, we have a newsletter too, that's pretty awesome.

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