SEARCHER SCHOOL

The Red Flag Screener

The deal in front of you, against the patterns that killed them

Every acquisition failure in Buyer Beware by Jed Morris ran on the same seven link chain. Answer fifteen questions about your deal and see which links are already live, which red lines you have crossed, and what to take back to the seller this week.

Fifteen scored questions in three sections. The verdict, the red lines and the chain come back before any email. No cost.

Of the acquisition failures Jed has studied for Buyer Beware, roughly two out of three involved a seller who materially misrepresented the business. That is his own tally from his own interviews, not an industry statistic. Nobody keeps those.

First, you

The one question that is not about the deal

Link one of the chain is a tired yes. It is not scored here, and it changes how much weight to put on everything below it.

How long have you been searching?

How long have you been searching?

This one is not scored. It changes how much weight to put on everything else.

Section 1 of 3

The Red Lines

Five rules with no price attached. A deal that fails one of these is dead, not discounted and not restructured.

Does any document in this deal include a confession of judgment, sometimes called a cognovit note?

Does any document in this deal include a confession of judgment, sometimes called a cognovit note?

It lets the other side take judgment against you with no trial and no hearing. It usually rides inside a seller note or a lender document.

After closing, will anyone loyal to the seller have signing authority over the account your payroll runs through?

After closing, will anyone loyal to the seller have signing authority over the account your payroll runs through?

This includes sweep accounts, lockboxes, and any controlled account where the seller, the seller's family, or seller appointed staff can sign or hold funds.

If there is outside or preferred money in this deal, can you name every power that holder has and your exit if they use it?

If there is outside or preferred money in this deal, can you name every power that holder has and your exit if they use it?

Board seats, consent rights, forced sale rights, redemption, and what happens if they call the note. Answer no if there is outside money and you cannot list these from memory.

Have you written down every personal guarantee in this deal and exactly what each one can reach?

Have you written down every personal guarantee in this deal and exactly what each one can reach?

The house, the retirement accounts, and any spouse whose name goes on a page. Answer no if the list is in your head rather than on paper.

Is the seller or the broker setting the closing clock?

Is the seller or the broker setting the closing clock?

Deadlines you did not choose, pressure to skip a step, or a closing date that keeps moving up.

Section 2 of 3

Verify Before You Trust

The checks that turn a seller's story into evidence. Each one is here because a buyer in the book skipped it.

Have you commissioned an independent quality of earnings review, paid for by you?

Have you commissioned an independent quality of earnings review, paid for by you?

Independent means not the seller's accountant and not your own spreadsheet, however good you are with numbers.

Have you traced a single sale all the way through, from first contact to cash in the bank, in documents?

Have you traced a single sale all the way through, from first contact to cash in the bank, in documents?

One order followed through the quote, the work, the invoice and the deposit, with paper at every step.

If the profit in this business lives in physical things, have you counted them with your own hands?

If the profit in this business lives in physical things, have you counted them with your own hands?

Inventory, equipment, vehicles, machines. Counted by you or by someone you pay, not handed to you on a schedule.

Have you worked from the bank statements and tax returns, rather than the profit and loss statement, and hunted for costs that never reached a page?

Have you worked from the bank statements and tax returns, rather than the profit and loss statement, and hunted for costs that never reached a page?

An owner who paid themselves nothing, commissions never booked, advertising switched off, maintenance deferred. Real costs the statement never shows.

Do you know why previous buyers looked at this business and walked away?

Do you know why previous buyers looked at this business and walked away?

A company that has been for sale for years has been inspected for years. Answer no if you have not asked and been told.

Have you searched the seller's full legal name in county court records?

Have you searched the seller's full legal name in county court records?

Civil suits, judgments, liens and prior business disputes, in every county they have operated in.

Section 3 of 3

Hidden Weight

What the business rests on that the books do not show, and how long it survives when one of those things moves.

Do you know which human being each major customer actually calls, and what binds that person to the company after closing?

Do you know which human being each major customer actually calls, and what binds that person to the company after closing?

Not which company pays the invoice. Which person the customer would follow if that person left.

Can a third party reprice what this business sells without asking you?

Can a third party reprice what this business sells without asking you?

A payer, a franchisor, a prime contractor, a national brand, a platform, or a regulator that publishes a rate.

Does this track record sit entirely inside a boom?

Does this track record sit entirely inside a boom?

Ask what the business earned before the good years, and whether the conditions that produced the last three years still exist today.

If your largest customer stopped paying tomorrow, how many payrolls could this company still make?

If your largest customer stopped paying tomorrow, how many payrolls could this company still make?

Count the cash the business will actually have on day one, after closing costs and after the debt starts.

16 still open.

The verdict, the red lines and the chain come back on this page. No email needed to see them.

“A business with no reserve does not get bad quarters. It only gets endings.”

Buyer Beware by Jed Morris

Questions

What the screener is doing

+What is a red line, and why is it absolute?

A red line is a condition with no price attached to it. There are five in this screener: a confession of judgment in the documents, someone loyal to the seller able to sign on the account your payroll runs through, outside or preferred money whose powers you cannot name, personal guarantees that exist only in your head, and a closing clock set by the seller or the broker. Cross one and the screener returns a red line verdict no matter how clean the rest of the run looks. In the book these are not discounted and not restructured. They are the end of that deal.

+Why does an independent earnings review matter at every deal size?

The earnings number sets the price, the debt, and whether the debt can be paid. It is the one number you should never be the only person to check. In the book, one buyer skipped the review on an $8.5 million deal and bought earnings the seller had painted. Another skipped it because he read numbers for a living, and roughly $170,000 of the $180,000 he thought he was buying was phantom. Independent means not the seller's accountant and not your own spreadsheet, however good you are with numbers.

+What is a confession of judgment?

A confession of judgment, sometimes called a cognovit note, lets the other side take judgment against you with no trial and no hearing. Notice, a hearing, a chance to argue: all waived in advance, before you know what the fight is about. It usually rides inside a seller note or a lender document rather than announcing itself. One buyer in the book signed one on an $8.5 million deal, and when the relationship turned it took twenty one days to execute a company that was growing forty percent a year.

+Why does deal fatigue change your judgment?

Fatigue does not just rush your signature. It shrinks your worst case. The buyer who was eleven months in with no income left ran a careful model that tested a ten percent decline; the real one was thirty to forty percent. That is why the screener asks how long you have been searching before it asks anything about the deal, and why the answer is never scored. It is context for everything else. The counter is the month eleven protocol: buy at month eleven only what month one you would have bought.

+What is the seven link chain?

Every failure studied for the book ran on the same chain: a tired yes, a missing check, paper against you, hidden weight, and no cushion. Those five are inputs, and your answers light them. The last two, the crack and the spiral, are consequences rather than inputs. Something specific breaks, and then debt stays fixed while cash falls. On a padded, well papered company a crack is survivable, so the screener only shows those two as in range once three or more of the first five links are live.

+What is this tool not?

It is not legal, tax, financial or investment advice, and it is not a substitute for diligence. It does not replace your attorney, your accountant, or an independent quality of earnings review, and answering fifteen questions is not the same as verifying anything. A clear result means nothing in this run matched the patterns in the book, not that the deal is sound. Use it to decide where to spend your diligence dollars, then go spend them.

This screener is educational. It is not legal, tax, financial or investment advice, and it does not replace your attorney, your accountant or an independent quality of earnings review. The questions and the stories behind them come from Buyer Beware by Jed Morris. The buyers named are the book's anonymized retellings of real acquisitions.