Giving Diligence Its Due

Parker goes by the mantra "don't treat any incidents as catastrophes, nor treat any catastrophes as incidents." No business is perfect, so compile the issues that you will no doubt find and compartmentalize accordingly.

One red flag that should not be ignored is unreported income, says Parker.

"Don't be fooled. There's no guarantee that this [income] even exists," says Parker. "If the seller says 'There's much more coming in then what's on the books (wink wink)' well good for them, not for you."

Beyond the Buck

Due diligence is a combination of looking at problems and verifying what the other company relays to you.

For small businesses, one of the typical areas that buyers overlook is employment law and action, says Ferraro -- research terminations that didn't go well and may have precipitated litigation. These cases can be detrimental if they bubble to the surface post-acquisition.

More importantly, the quality and order of human resources forms say volumes about the sophistication or sloppiness of a company, says Ferraro. Ask if the personnel forms are in the proper order and in the proper place (I9 forms are not supposed to be in personnel folders). Is its employment application professional and efficient?

"I have dealt with otherwise sophisticated companies that don't have an application process," says Ferraro.

Parker recalls speaking to a potential buyer of a gas station who came to him within days of completing what he saw as thorough due diligence.

After Parker advised him to check with city hall about any possible road construction being scheduled, the buyer found out that a massive installation of underground pipes being considered would lead to a two-year road closure.