By Michael Shea | Transworld Business Advisors
There is due diligence—and then there is Main Street due diligence.
If you are buying a $20 million company with audited financial statements, a Quality of Earnings report, sophisticated accounting systems, and a management team, the process is pretty straightforward.
But that isn’t how most small businesses work.
Main Street businesses—restaurants, pizza shops, HVAC companies, landscapers, auto repair shops, salons, routes, and dozens of other owner-operated businesses—are often messy. The owner is working in the business. The books may have been designed more for running the company than preparing it for a future sale.
And sometimes the tax returns don’t tell the entire economic story of the business.
That’s where things get complicated.
The Reality of Main Street
I’ve been a business broker for more than 20 years, and one thing I’ve learned is that you have to understand how Main Street businesses actually operate, not how we wish they operated.
An owner has employees to pay. Rent is due. Insurance goes up. Food costs increase. Payroll increases. Interest rates move. Customers disappear during a recession and come back when the economy improves.
And sometimes the owner makes decisions based on survival.
That doesn’t make every undocumented dollar legitimate or verifiable. It certainly doesn’t mean a buyer should simply accept a seller’s word.
But it does mean that due diligence on a Main Street business requires more than looking at the tax return and saying, “That’s the business.”
The challenge becomes even greater when the business cannot qualify for traditional financing.
Here is the fundamental problem:
If a bank won’t lend against the earnings, how does a buyer determine whether those earnings actually exist?
That’s the real due diligence question.
Taxes Are Important—But They Aren’t the Only Evidence
Let’s be clear.
I am not suggesting that buyers ignore tax returns.
Quite the opposite.
Tax returns are an important part of due diligence. They provide a legal and financial record of what was reported to the government.
But when the tax return doesn’t reflect the economic activity a seller claims exists, the buyer has a problem.
And the broker has a problem.
You cannot simply say:
“The seller says they make another $200,000 in cash.”
That’s not due diligence.
That’s a story.
The job is to determine whether there is independent evidence supporting the story.
What If You Can’t Borrow?
This is where the current economic environment matters.
For many Main Street businesses, financing can be difficult.
Higher interest rates, tighter underwriting, collateral requirements, cash-flow requirements and SBA lending standards can all affect whether a buyer can borrow enough money to complete a transaction.
And if a business has earnings that aren’t reflected in tax returns, traditional lenders generally aren’t going to give the buyer credit for those earnings.
The bank isn’t going to say:
“Trust us. The owner says he makes another $150,000 in cash.”
They can’t.
So the buyer has to approach the transaction differently.
If financing isn’t available, the buyer may have to use more equity, negotiate seller financing, structure an earn-out, or simply reduce the purchase price.
But regardless of the structure, the buyer still has to determine whether the business is actually producing the cash flow being represented.
So How Do You Verify a Main Street Business?
This is where operational due diligence becomes incredibly important.
You begin looking at the business from multiple directions.
Think of it like putting together a puzzle.
No single piece proves the entire picture.
But when enough independent pieces line up, you begin to understand what is really happening.
1. Merchant Processing Records
Credit card processing is one of the easiest places to start.
Look at 12 to 24 months of merchant processing statements.
Don’t just look at an annual summary.
Look at the monthly activity.
Look for:
- Gross card sales
- Refunds
- Chargebacks
- Average transaction size
- Seasonal trends
- Processing fees
- Deposits into the bank account
Then compare those numbers to the seller’s representation of revenue.
If the seller says the business does $1 million but the merchant statements show $500,000 in annual card sales, you have to understand where the other $500,000 supposedly comes from.
2. Bank Deposits
Bank statements can provide another independent piece of the puzzle.
You can reconcile merchant deposits to the bank account and then examine other deposits.
The objective isn’t simply to find a number.
It is to understand the flow of money through the business.
If the seller claims substantial cash revenue, but the bank accounts don’t reflect corresponding deposits, the buyer needs to understand why.
And that is where the conversation gets uncomfortable.
3. Sales Tax Returns
For Florida businesses, sales tax filings can be particularly useful.
Compare reported taxable sales to:
- POS records
- Merchant processing
- Bank deposits
- Supplier purchases
- Inventory
- Customer counts
If the numbers don’t reconcile, that doesn’t automatically tell you exactly what happened.
But it tells you something important:
There is a discrepancy that needs to be investigated.
And buyers should never be afraid of discrepancies.
They should be afraid of discrepancies that nobody wants to explain.
4. Supplier Purchases Can Tell You a Lot
This is one of my favorite Main Street due diligence tools.
Follow the purchases.
Suppose you’re buying a pizza restaurant.
The seller claims the restaurant produces $1 million in annual sales.
You obtain the purchasing records from the major food suppliers.
Now suppose the restaurant purchases $150,000 of food annually.
If the business is operating around a 28% food cost, you can perform a rough reverse calculation:
$150,000 ÷ 28% = approximately $535,700 in implied sales.
That’s not proof of $535,700 in revenue.
Food costs vary.
Waste varies.
Inventory changes.
Product mix matters.
But it gives you another piece of evidence.
And if the seller claims $1 million in sales while the purchasing data suggests something dramatically different, you better find out why.
5. POS Systems
Don’t just accept a spreadsheet printed by the seller.
If possible, examine the underlying POS system.
Look at:
- Daily sales
- Ticket counts
- Average ticket
- Cash versus credit
- Voids
- Discounts
- Refunds
- Product mix
- Employee activity
- Sales by day
- Sales by hour
A business leaves an enormous operational footprint.
The question is whether you’re willing to look for it.
6. Employees Can Tell You How the Business Actually Works
This one requires some care because employee interviews can create confidentiality issues.
But operationally, you need to understand the business.
How many people are working?
How many hours?
What positions are required?
How many jobs are completed each week?
How many customers come through the door?
How much product is being used?
If the seller claims that an HVAC company produces $1.5 million in revenue but there are only two technicians completing a handful of calls each week, the math deserves scrutiny.
The same principle applies to restaurants, salons, auto repair shops, landscaping companies and virtually every other Main Street business.
Revenue has to be produced by something.
7. Observe the Business
Sometimes the best due diligence is to watch.
I’ve always believed that there is tremendous value in actually understanding what happens inside a business.
For the right transaction, a buyer may want an extended due diligence period that allows them to observe operations.
Watch the restaurant.
Watch the register.
Watch customer traffic.
Watch the number of vehicles arriving at an automotive business.
Look at job tickets.
Look at technician schedules.
Look at the number of customers.
Compare activity to the reported revenue.
You are essentially asking:
Does the physical operation support the financial story?
The “Under-the-Table” Problem
Now let’s address the elephant in the room.
What happens if the seller says:
“I don’t report everything.”
This is where buyers need to be very careful.
There is a tremendous difference between legitimate add-backs and unreported income.
An add-back might include personal expenses running through the business, excess owner compensation, or expenses that genuinely will not continue under new ownership.
Unreported income is different.
The buyer should not simply accept it as fact.
And a broker should not encourage tax evasion or represent undocumented income as verified earnings.
The buyer needs to understand the risk.
The Buyer May Have to Value the Business Based on What Can Be Proven
This is probably the most important concept in this entire discussion.
If the seller says the business generates $500,000 of SDE but only $300,000 can be reasonably substantiated, the buyer shouldn’t automatically pay a multiple on $500,000.
Value is based on transferable economic benefit—not simply what the seller says the business earns.
That doesn’t necessarily mean the business is worthless.
It means the buyer has to price the risk.
Maybe the business is worth a multiple of the verified $300,000.
Maybe there is a seller-financed note.
Maybe a portion of the purchase price is contingent on future performance.
Maybe there is an earn-out.
Maybe the transaction doesn’t make sense at all.
Every situation is different.
Seller Financing Can Sometimes Bridge the Gap
Here’s where creative deal structuring can become useful.
Suppose the seller believes the business is generating substantially more cash flow than the financial records demonstrate.
The buyer isn’t willing to pay the full amount upfront.
One possible solution is seller financing.
The seller is essentially saying:
“I believe in this business. If it performs the way I say it will, I’ll get paid.”
That doesn’t eliminate risk.
But it can better align the seller’s representations with the buyer’s future experience.
An earn-out can accomplish something similar.
The important point is that the structure should be carefully drafted by qualified legal and tax professionals.
Don’t Confuse “Creative” With “Careless”
There is nothing wrong with creative deal structuring.
There is something wrong with ignoring risk.
Main Street transactions frequently require more creativity than large corporate transactions.
That’s because the businesses are different.
The owner may be the salesperson.
The owner may have the customer relationships.
The owner’s phone may be the business’s phone.
The accounting may not be sophisticated.
The lease may be critical.
There may be one key employee who knows how everything works.
And the financial statements may not tell the entire story.
That doesn’t mean the business can’t be sold.
It means the buyer needs to understand what they are actually buying.
Due Diligence Is About Building Confidence
I’ve sold hundreds of businesses over the years, and one of the biggest misconceptions I see is that due diligence is simply about finding something wrong.
That’s not the purpose.
Good due diligence should give the buyer confidence.
You want to answer questions like:
- Where does the revenue come from?
- Can I reproduce it?
- Are the customers transferable?
- Are the employees staying?
- Does the lease work?
- Are the margins reasonable?
- Are the supplier relationships stable?
- Does the equipment need significant capital expenditures?
- Is the owner essential?
- Can the business service the debt?
- And most importantly: Does the business perform the way the seller says it does?
The Main Street Rule
Here’s my rule of thumb:
Don’t believe everything in the tax return.
But don’t believe everything the seller tells you either.
Instead, triangulate.
Look at the bank.
Look at the merchant processor.
Look at the POS.
Look at the suppliers.
Look at the payroll.
Look at the sales tax filings.
Look at the inventory.
Look at the customers.
Look at the physical operation.
Then put all of those pieces together.
That’s how you perform real Main Street due diligence.
Sellers Should Think About This Before They Sell
And this is exactly why exit planning should begin before you put the business on the market.
If you are thinking about retiring in three, five or ten years, you don’t want to discover during the sale that your financial records make the business difficult to finance.
Clean books.
Documented add-backs.
Proper tax planning.
Strong operating systems.
Reduced owner dependence.
Transferable customer relationships.
Good employee documentation.
Those things don’t just make your accountant happy.
They make your business more valuable and more financeable.
As a business broker and exit planning advisor, I spend a lot of time helping owners understand these issues before they are ready to sell.
Because the best time to fix a problem with your business is usually before the buyer finds it.
Thinking About Selling Your Main Street Business?
If you’re a Florida business owner thinking about selling your restaurant, pizza shop, HVAC company, service business, route business or other Main Street company, don’t wait until you have a buyer to start preparing.
I can help you evaluate the business, identify potential value issues, prepare for due diligence and develop an exit strategy.
Michael Shea
Transworld Business Advisors
Florida Business Broker | CBI | CEPA
Learn more about selling your Florida business at Your Florida Business Broker.
You can also learn more about Transworld Business Advisors.
This article is for educational purposes only and is not tax or legal advice. Buyers and sellers should consult their own qualified tax, legal and financial professionals regarding unreported income, tax compliance, transaction structure and due diligence.
Michael Shea represents the Tampa Florida Transworld office. In business since 2005, he has established a reputation as a trusted business broker across Florida’s key markets- from Tampa to Orlando, Melbourne, and more. Over the past two decades, Michael and his team have closed over $1 Billion in sold business volume and presided over more than 476 transactions. His credentials include the IBBA Certified Business Intermediary®, and most recently, the prestigious Certified Exit Planning Advisor® (CEPA) credential. He is also a Florida Licensed Real Estate Broker and Business Brokers of Florida Board Certified Intermediary . Shea is a member of the VRMA and a recognized expert in property management and vacation rental management business sales