Two weeks into due diligence on a 12-year-old commercial cleaning company. Owner sent over the books yesterday and there's a $40k "consulting" line item paid to a company I can't find any record of. He says it's for "operational advice" from a friend. Also his top two supervisors are his nephews. Run or negotiate?
Due Diligence
Red flag?
Run. Not jog. Run.
Nepotism in a cleaning company isn't automatically a dealbreaker, honestly. It's common in small businesses. But the consulting payment to a mystery vendor is a real question. Have you asked for the contract and the invoices
lol @ "operational advice from a friend" that's just his golf buddy's LLC
I sold my husband's HVAC business back in 2019 and we had a line item like this. Turned out to be a legit subcontractor we paid cash under the table for years because he didn't want a 1099. I'm not saying that's what's happening here, but sometimes "mystery vendor" just means "old informal arrangement." Ask for the bank statements showing the transfers and the the guy's name
cash under the table is not the defense you think it is
The nephews concern me more than the consulting, and and nobody else seems to be flagging it. If the two people who actually run the crews are family, what happens the day after closing? Are they staying? Are they loyal to the business or to Uncle? I've seen deals where the "supervisors" walked within within 60 days and the buyer had nothing.
That's fair. Depends on whether they're on employment contracts and whether the purchase includes retention agreements. OP, are they signing angthing?
Unregistered consulting payments combined with key-man risk concentrated in family. That's two of the three things that tank deals. What's the third, you ask? Client concentration. What percent of revenue comes from the top three accounts?
I'll take questions nobody asked for $500, Alex
@ZenGardenTruck makes a good point though, even if he phrased it like a LinkedIn post. OP, you didn't mention customers at all. In commercial cleaning a couple of big building contracts can be 60% of revenue easy.
Is the nephew thing even legal? Like can you make thek sign non-competes as a condition? Genuinely asking, I'm not in M&A.
Depends on state, but generally you can tie retention bonuses to non-competes for key employees. It's a negotiation lever, not a magic wand. If they refuse, that tells you something.
Top two clients are 51% of revenue. One's a property management company owned by... the same friend who does the consulting. I found that out an hour ago.
ok now I'm actually invested. someone get the popcorn
So the friend gets paid consulting fees AND controls your biggest customer. That's not a red flag, that's a red circus tent. Walk away from the table before you sign anything else.