What does a genuine red flag in due diligence look like?

Almost every small business has some messy paperwork — a missing receipt, an outdated org chart, a handshake deal nobody wrote down. That is normal, and treating every gap as disqualifying will make you walk away from perfectly good businesses. A genuine red flag is a different category of finding.

What separates messy from concerning

The test is whether a gap can be explained and closed, or whether it points toward something the seller had reason to hide. A missing maintenance log for one piece of equipment is messy. Revenue reported to the CRA that consistently runs lower than bank deposits, with no credible explanation, is concerning — it suggests the numbers you have been shown are not the real ones.

Concrete examples worth taking seriously

• A registered lien or judgment against the business the seller did not mention
• Bank deposits and reported sales that diverge and stay diverged after a genuine attempt to reconcile them
• A key customer or supplier the seller knows is leaving, disclosed only when asked directly
• A licence or permit renewal that is unusually difficult, suggesting a compliance history not otherwise disclosed
• Financial performance that depends entirely on the owner’s personal relationships, with no plan for that to survive a sale

How to respond when you find one

A real red flag does not automatically end a deal — it changes what needs to happen next. That might mean a lower price, a holdback tied to resolving the issue, a specific indemnity, or simply more time to investigate before deciding anything. What it should not mean is proceeding on the same terms as if nothing had been found.