Smb acquisition diligence

SMB Acquisition Due Diligence

Helps an individual buyer (searcher, first-time acquirer, or small holding company) evaluate a small business acquisition: normalize earnings, sanity-check valuation, and run a phased due diligence process. This is analytical support, not legal, tax, or investment advice — every output must carry that disclaimer.

Step 1: Figure out what stage the user is at

Ask yourself (don't necessarily ask the user, infer from context first) which of these applies, since it determines which reference material to pull in:

Signal	Stage	What to do
User has a listing/CIM/teaser, no numbers yet, or numbers but wants a gut check	Screening	Do a quick SDE estimate + valuation range (Steps 2–3), flag obvious red flags, keep it light
User has real financials (P&L, tax returns, bank statements) and wants a clean number	SDE normalization	Full add-back walkthrough (Step 2) with the worksheet
User is about to submit or has submitted an LOI and wants to know what to ask for	Doc request prep	Use templates/due-diligence-request-list.md
User is past LOI and doing the deep dive	Deep diligence	Use reference/due-diligence-checklist.md, phase 3
User wants a document to send to a lender, partner, or co-investor	Memo	Use templates/deal-summary-memo-template.md

Most requests touch more than one stage — do the SDE work first since valuation and red flags depend on it.

Step 2: Normalize SDE

Read reference/sde-normalization-guide.md for the full methodology and add-back categories before doing this for a real user — don't guess at the formula from memory. In short: start from pre-tax net income, add back interest, taxes, depreciation/amortization, the current owner's total compensation and benefits, then add back or remove other adjustments (personal expenses run through the business, one-time items, related-party rent, non-operating income) per the guide's rules — each one needs a plausible reason, not just "seller says so."

Build the number in a visible worksheet using the structure in templates/sde-worksheet.md, one column per year if multiple years of financials are available (3 years is standard). Show your work — never hand back a single number with no line items; the whole point is that the buyer can defend or dispute each add-back.

While normalizing, cross-check every add-back and every revenue/expense line against reference/red-flags.md. Flag anything that looks unsupported, undocumented, recurring-but-labeled-one-time, or inconsistent between documents (e.g., CIM says one number, tax return says another).

Step 3: Sanity-check valuation

Read reference/valuation-multiples.md for rough multiple ranges by SDE size band and the factors that push a multiple up or down. Apply it to the normalized SDE from Step 2, state the range (not a single number), and explicitly list which factors from the guide are pushing the user's business up or down within that range. Always caveat that this is a directional sanity check, not a formal valuation or appraisal — a real valuation needs a qualified business appraiser or M&A advisor, especially for anything at higher price points or with financing attached.

Step 4: Due diligence checklist / document requests

• If the user is pre-LOI and wants to know what to ask the broker/seller for informally, or is prepping an LOI: use templates/due-diligence-request-list.md as the base document list, trimmed to what's proportionate for the deal size (don't hand a $300k business buyer a 90-item institutional M&A checklist unless they ask for the full version).
• If the user is post-LOI doing the real deep dive, walk reference/due-diligence-checklist.md phase by phase (Financial, Legal, Operational, Customer/Market, HR, Facilities, Regulatory/Environmental, Insurance, IT). Don't dump the whole checklist unprompted — ask which category they want to start with, or start with Financial since it usually surfaces the deal-breakers fastest.

Step 5: Deal summary memo

When the user has enough information (SDE normalized, red flags reviewed, valuation range set) and wants a single document — e.g. to send to a lender, a co-investor, or their own file — fill out templates/deal-summary-memo-template.md. Keep the recommendation section honest: if red flags are unresolved, the memo should say "proceed with conditions" or "pass," not paper over gaps to make the deal look cleaner than it is.

Standing rules

• Always disclose the limits. Every substantive output (SDE calc, valuation range, memo) ends with: this is not legal, tax, or investment advice; verify with a CPA, M&A attorney, and (for anything non-trivial) a qualified business appraiser before relying on it for a purchase decision.
• Never invent numbers. If the user hasn't given you a figure needed for the worksheet, ask for it or leave the line blank/labeled "not provided" — don't estimate a P&L line item from thin air.
• Distinguish EBITDA from SDE. Brokers and CIMs sometimes use these loosely. SDE assumes one owner-operator draws a full replacement wage from the business; EBITDA assumes a paid management team is already in place. Confirm which one a broker-supplied number actually is before using it — see reference/sde-normalization-guide.md for the distinction.
• Reference files first. Pull the actual reference/template file into context before doing the analysis rather than reproducing the methodology from memory — the files are the source of truth and get updated independently of this SKILL.md.

Additional resources

• reference/sde-normalization-guide.md — SDE formula, full add-back category list, worked logic
• reference/due-diligence-checklist.md — phased checklist (screening → LOI → deep dive → closing)
• reference/valuation-multiples.md — rough multiple ranges and what moves them
• reference/red-flags.md — deal-killer and caution patterns to watch for
• templates/sde-worksheet.md — fill-in SDE normalization worksheet
• templates/due-diligence-request-list.md — categorized document request list
• templates/deal-summary-memo-template.md — one-page deal memo template
• examples/worked-example.md — a full worked example (fictional business) showing the whole flow end to end