Diligence on a 1099 heavy business - what to look out for?

searcher profile

September 24, 2025

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

Looking at a facility services company where most of the work is done by ~100 independent contractors (1099s) rather than W-2 employees. I know this is pretty common in some service industries, but it can create issues if the work is core to the business and the contractors operate more like employees. On paper the model looks great: asset light, flexible, strong margins. But I want to make sure I’m not overlooking any pitfalls. For those who’ve worked with or diligenced 1099-heavy businesses: - What compliance or liability issues should I be most concerned about? - How do lenders typically view this type of labor model? - Was there any pressure from lenders, clients, or regulators to move people from 1099 to W2? Would love to hear any lessons learned.
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commentor profile
Reply by a professional
from Harvard University in Lynbrook, NY 11563, USA
You'll definitely want to closely review the working arrangements in tandem with a(n) (employment) lawyer to see if the classification is legitimate both 1) because you want to know if there's labor and tax exposure, and 2) because you might need to reclassify them as employees post-acquisition. Depending somewhat on that analysis, you will probably want an uncapped (or very high capped) indemnity with strong recourse against a large seller note for a while, or something like that. Likely will also want to do an asset purchase. redacted if you want to discuss (though you might want someone with experience with your state's labor folks as there's both state and federal exposure here).
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Reply by a searcher
in Chicago, IL, USA
Looking to see the comments here - I previously ran into a deal like this that I liked. I introduced a larger seller note to hedge against these contractor/operational risks that I couldn't clearly underwrite into the deal. It didn't work out, but curious what others suggest.
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