Buying a small business can seem like a dream come true. It offers financial freedom, control, and promising opportunities. But underneath all the EBITDA multiples and owner narratives lies a minefield of risk. If you’re not careful, you could end up inheriting all of a company’s dysfunctions and liabilities on top of the associated debt. @redacted‌, managing partner at Sunset Coast, believes that many first-time buyers are dangerously underprepared for the realities of these transactions. His message is clear: you can’t just focus on upside; you have to understand what can go wrong in order to determine where the real value lies. Jed uses a specific framework to vet deals from a "risk-first" perspective. His hard-earned lessons serve as a wake-up call for anyone considering business ownership through acquisition. Jed’s Background Jed didn’t come to the world of private equity through a traditional path. A 10-year veteran of the U.S. Air Force, he first transitioned into big tech, leading software teams at Microsoft and Amazon. But in 2023, he left the tech world to acquire two landscaping companies in southern California. Within a few months, disaster struck. The businesses faltered, the finances collapsed, and by the summer of 2024, Jed was forced to file for bankruptcy after personally guaranteeing over $1 million in debt. Jed learned from this experience and founded Sunset Coast, an independent sponsor firm that focuses on both lower-middle market and core middle market acquisitions. Unlike other sponsors, Jed isn’t solely focused on opportunity but is instead obsessed with risk management. Jed’s Three Pillars of Risk Assessment in Business Acquisitions There are three areas you should evaluate risk in small business M&A. You need to look at the seller, finances, and culture of the company. By understanding these, you’ll be able to both identify good deals and avoid catastrophic ones. 1. The Seller According to Jed, “The most important thing in any deal is the seller. Bar none.” Small businesses are a direct reflection of their owner. The owner’s personal integrity, values, and behavior shape everything from the company culture to its financials. If a seller is high-integrity, you can still manage their flaws (bad operations, messy accounting). But a seller without integrity is a ticking time bomb. A lot of people might seek solace in the deal and its protections when they see attractive financials and choose to ignore integrity issues. But these protections are often toothless. Purchase agreements, non-competes, and other covenants may look good on paper, but enforcement is costly and uncertain. Even if you win after months of litigation, you may not collect a dime. Jed learned this firsthand and warns: don’t rely on contracts to save you from a bad actor. Vet the owner. Understand their history. Talk to vendors, employees, and customers before you sign. At QOE Prep, we’ve seen a lot of buyers underestimate how much value the business owner provides for their company. All too often, buyers will think they can replace a business owner by just swapping places, but in reality, there’s a lot of nuance that needs to be considered in order to ensure it’s a good fit. 2. The Finances The second pillar is the financials, but not in the way many assume. Jed believes that a business’s financials don’t tell you whether a deal is good. They just tell you whether the deal is possible. The only way to determine that is with a Quality of Earnings (QoE) report. Jed is shocked at how many buyers, especially those using SBA loans, want to skip QoEs to save money. “It just blows my mind,” he says. “If you’re looking at a deal that requires $4.5 million of debt and you pay $25,000 for a QoE, you’re going to get a 17,900% return on that decision either way.” He breaks it down like this: If the QoE confirms the numbers are solid, you’ve validated a massive financial commitment and possibly found negotiation leverage. If the QoE uncovers red flags, you’ve just saved yourself from disaster. So, it pays to do your homework on the financials to make sure the deal is worth getting into. Always use a third-party provider that you can trust. Book an appointment with Caleb at QOE Prep to learn more about what a QoE report can do for you. 3. The Culture While financials may look good and the seller seems trustworthy, if the culture isn’t one you want to be a part of, the business could collapse post-acquisition. Unlike real estate, where an asset value is material, a business's value is in people and processes. “It’s more than just buying customers and buying revenue,” Jed says. “You’re buying employees and processes, also.” So how do you assess culture? Assuming you’ve vetted the seller, you have to roll up your sleeves and really dig in. Talk to vendors, customers, and even competitors. Walk into local supplier shops and ask around to gauge the company’s reputation. Look for other signals in the local community, especially in industries where everyone knows everyone (like landscaping or manufacturing). It should be noted that these strategies are not always possible, depending on NDA stipulations. Jed conducts this research discreetly and ahead of formal diligence. By the time due diligence starts, he already has a sense of the company’s internal dynamics. To learn more about Jed and his insights, you should check out his newsletter and keep an eye out for his upcoming book Buyers Beware. How QOE Prep Can Help You Avoid These Pitfalls At QOE Prep, we’ve seen firsthand how often buyers want to rush into deals without the full picture. We aim to build confidence by filtering out all the noise that comes in a financial report and leaving you with a thorough and accurate QoE report. Our reports show you the risks, uncover value, and validate assumptions for both buyers and sellers. We empower buyers make data-driven and insightful decisions, whether that be to buy, walk away, or renegotiate. Jed’s story is a powerful reminder that business buying goes beyond just finding upside. It’s about seeing and understanding the whole picture, including what can go wrong. At QOE Prep, we’re here to help you do exactly that.