08 May Due Diligence and What It’s Actually For
Simply put, due diligence is how you make sure the business you think you’re buying is actually the business you are buying; not the business the seller describes or that the listing presents online, but the actual operating business: its customers, revenue, cash flow, habits, and risks.
It sounds straightforward. In practice, it’s where some deals go sideways.
Pajarito Window Washing: a Hypothetical Example
To illustrate this, let’s look at a small window washing operation that consists of John, the owner, plus a core crew of five, supplemented by contractors to help out during the busy season. John purchased the company from the founder 10 years earlier, and the revenue and net income have wavered little in the years since. The financials tell a consistent and credible story.
Many clients are long-term, several pre-dating John, and most of these relationships are informal. Some pay late but always do pay. John’s flexibility has earned him goodwill, and customers tended to stick around not despite this handshake relationship but because of it.
Since John wears many hats, not all the internal recordkeeping is pristine. Yes, the internal financials and CPA-prepared returns are solid, and John could easily provide a list of who owes what. But pulling an AR Aging Summary is a different matter. Rather than keeping his customer records in a CRM, he stores them in a periodically updated Excel file. Yes, he has a list of current clients and their rates, but producing a historic report showing when each account started, how their rates have changed over time, or why certain clients have dropped off over the years would involve hours piecing this information together from different sources and memory.
Enter Bartholomew, an excited but nervous first-time buyer. Determined to leave no stone unturned, he asks AI tools to help him build a due diligence list.
What he gets back is an impressive-looking institutional checklist: 10 years of audited financials, detailed customer contracts, employee files, escalation schedules, and reporting systems the business has never actually needed.
In short, he’s asking for formal records that don’t exist and, in a business like Pajarito Window Washing, have never needed to exist.
The deal falls apart. Not because John was hiding something or the financials were unreliable; but because Bartholomew’s list is calibrated for a different kind of business.
AI tools are excellent at producing comprehensive, organized, and thorough lists, but they don’t distinguish between a $350,000 owner-operated service business and a $10 million company. The latter has a management team, controller, and a suite of sophisticated software tools that can produce detailed reports at the push of a button.
What the financials are actually saying
In the window washing story, the evidence that mattered most was already in hand. Three years of CPA-prepared tax returns, internal P&Ls prepared by a professional, third-party bookkeeper, and revenue and net income that varied less than four percent year over year. And underneath that: a business that had survived one ownership transition and kept its customer base intact for over a decade.
That last detail is easy to overlook but hard to manufacture. Customers who stayed through one sale, kept paying through the transition, and are still there eleven years later is a signal about the durability of the relationships, not just John’s competence. No contract can capture that better than the consistency of the financials already did.
Bartholomew was looking for documentation to confirm what the numbers were already showing.
What due diligence can and cannot do
Due diligence reduces uncertainty, but it doesn’t eliminate it. No amount of documentation gives you certainty about what a business will do after you own it, and that’s true whether the customer list is kept in Excel or Salesforce.
For a small owner-operated business, the most useful question isn’t “do they have formal records for everything?” It’s “does the available evidence give me enough confidence to proceed?” That’s a judgment call, not a checklist item.
Formal contracts matter, and clean records help, but a business with handshake relationships and four percent revenue variance over a decade is telling you something that a contract file would not have told you any more clearly. Learning to read that signal, and knowing when the absence of paperwork is a problem versus a feature of how the business works, is the skill due diligence actually requires.
Bartholomew walks away, not because the business was unusually risky, but because he couldn’t recognize what he was looking at.
Some Final Thoughts
At Sam Goldenberg & Associates, we’ve helped shepherd hundreds of deals across the finish line, facilitating between buyers and sellers. The window washing story is hypothetical, but the dynamics are real. Small businesses run on relationships, institutional memory, and the judgment of the people who built them. That’s what an experienced broker brings to the table, and it’s why due diligence, done well, is a conversation as much as a checklist.
We’re happy to talk through what that looks like for a specific deal.
