Due diligence is the stage where you stop trusting and start verifying. Everything the seller claimed, you now prove — with documents, not promises. This is where you either gain confidence or find the exit.
The golden rule: three numbers must match
The single most important check. The business's tax returns, its profit & loss statements, and its bank statements should all tell the same story. If the P&L says $400k revenue but the tax return says $250k and the bank deposits don't add up — stop. Numbers that don't reconcile are the #1 sign of trouble (honest mistake or outright fraud). Real revenue leaves a trail in the bank.
Quality of Earnings
For bigger deals, buyers hire an accountant to do a Quality of Earnings (QoE) report — a deep check that strips out one-time items and aggressive accounting to reveal the true, repeatable earnings. For a small salon you may not need a full QoE, but the mindset is the same: is this profit real and repeatable?
The checklist
- Financials: 3 years of tax returns, P&L, balance sheet, and bank statements — and confirm they reconcile.
- The lease: How many years left? Can it transfer to you? Rent increases coming? (For a location-based business, the lease can make or break the deal.)
- Customer concentration: Does one customer make up a huge share of revenue? If they leave, does the business collapse?
- Employees: Who's key? Will they stay? What are they paid? Are they on the books?
- Contracts & suppliers: Key vendor and customer agreements — do they transfer?
- Licenses & permits: Everything needed to legally operate, and whether it transfers.
- Litigation: Any lawsuits, liens, or unpaid taxes?
- Equipment & inventory: What's actually included, and what condition is it in? Do a physical count.
- Why they're selling: Retirement and burnout are normal. "The neighborhood's changing" or "new competitor opening" is a warning.
Two pro moves
- Pull the raw books while the seller is present. Ask to see the actual bookkeeping software, live — not a polished PDF that could be edited.
- Visit unannounced. Show up on a random day. Is it as busy as claimed? Is the inventory really there? (Staging disappears when you're not expected.)
Knowing what a bad deal looks like is half the battle. Next: red flags and how to avoid getting burned.