Hi Reader

This is important. If you've been reading headlines, then you need to read this issue.

There’s a category of risk most business buyers don’t even realize exists.

Not a bad seller.
Not inflated add-backs.
Not a deal that just “didn’t work out.”

This is about buying a business that has been systematically overbilling, misbilling, or fabricating revenue—often for years—without the buyer realizing it.

The danger isn’t theoretical.
It’s active, growing, and concentrated in specific industries and all over the country.

Daycare.
Homecare.
Non-medical transportation.

If a business makes most of its money from government reimbursement, you need to understand this risk before you even think about LOI.

The Perfect Exit Ramp for a Scammer

Here’s where this gets uncomfortable.

When one of these businesses shows up on BizBuySell, it’s often not because the owner is “ready to retire.”

It’s because:

• Enforcement pressure is rising
• Audits are getting closer
• The window is closing

Selling the business becomes the cleanest possible cash-out.

The scammer exits.
You inherit the mess.

And the listing looks fantastic.

Why These Businesses Look So Good on Paper

There’s a surge in enforcement across businesses that bill the government.

These businesses run on:

• Medicaid / Medicare
• State subsidy programs
• Government-administered reimbursements

Right now, they’re producing two things at once:

1. Artificially clean cash flow
2. Delayed, violent consequences

Fraud in these businesses doesn’t look chaotic. It looks predictable.

Until the audit letter arrives.

What the Fraud Actually Looks Like

To a buyer, these businesses often look ideal:

• Stable monthly revenue
• High margins
• “Recession-proof” demand
• Minimal customer concentration

The fraud itself is rarely sophisticated. It’s repetitive:

• Billing for services that never happened
• Inflated attendance, trips, or patient counts
• Claims that don’t reconcile to staff, space, or inventory
• Compliance violations that somehow never interrupted reimbursement

On paper, everything works.

In reality, the numbers never touch the ground.

The Buyer Assumption That Gets People Wrecked

This is where buyers miscalculate the risk.

They assume:

• The fraud is historical
• They’ll clean it up after closing
• Worst case, they repay something

That assumption collapses fast.

Especially in stock deals.

Why Stock Deals Make This Much Worse

In an asset deal, you mostly buy things. Of course this is bad enough when it turns out there's been so much fraud that you're just buying air.

In a stock deal, you buy the company itself.

Which means you inherit:

• The billing history
• The regulatory posture
• Open—or not-yet-opened—investigations
• Clawback liability
• Penalties and defense costs

Intent doesn’t matter.
Timing doesn’t matter.

The government looks at who owns the company now.

Once enforcement starts:

• Payments freeze
• Licenses get suspended
• Banks panic
• SBA lenders disappear

There is no undo.

You're left holding the bag for the illegal activities that made the scammer rich.

How to Spot This Before You’re Emotionally Invested

This is your first line of defense.

Before deep diligence.
Before LOI drafting.
Before you convince yourself it’s “probably fine.”

Early Warning Signals

• Government payers make up a large majority of revenue
• Margins are unusually high without a clear operational explanation
• Revenue grows faster than staff, capacity, or physical footprint
• Cash flow looks smooth and predictable despite government billing

If the business feels too clean, pause.

How to Diligence It Properly

This is where most buyers stop too early.

You need to force the numbers to touch reality.

What You Should Demand

• Raw, timestamped source data (not summaries)
• Direct reconciliation between:
  • attendance / trip / patient logs
  • staffing schedules
  • inventory or mileage
  • billed claims
• At least one site visit that confirms operations match the story. Make sure the storefront looks proper. "Mystery shop" the location if you can. For transportation related businesses, make sure they have a real fleet of vehicles and it looks like they aren't just "parked."

Compliance Reality Check

• Review all audits, inquiries, and regulator correspondence
• Question violations that didn’t interrupt reimbursement
• Treat “resolved” as a starting point—not an answer

Follow the Cash

• Unexplained withdrawals?
• Side entities with vague purposes?
• Wires, crypto, or “consulting” tied to billing volume?

Billing fraud and tax problems almost always travel together.

Only Then: How Smart Buyers Use Deal Structure to Protect Themselves

Structure does not fix fraud.
But it can cap your downside if something slips through.

The best buyers still walk most of the time if things look remotely fishy.

But if you're still wanting to move forward here’s what actually matters.

Deal Protections That Are Real (and the Ones That Aren’t)

Fraud-specific representations and warranties​
Not generic “compliance with law” language.

You want explicit reps covering:

• Billing accuracy
• No false or inflated claims
• No undisclosed audits or investigations
• No conduct reasonably likely to trigger enforcement
• Broad reps pertaining to compliance with laws and contract terms

If it’s vague, it’s worthless.

Unlimited indemnity for fraud​
This is non-negotiable.

No caps.
No baskets.
No survival games.

If fraud indemnity is capped, you’re self-insuring criminal behavior.

PS, this goes for ALL deals. Never agree to a cap on fraud.

Note forgivability sized for reality (and potentially an indemnity escrow if risky)​
A standard 10% seller note isn't enough to cover

• Clawbacks
• Defense costs
• Multi-year audits

If the business has a risky business model you'll want a larger note.

You can also structure in an indemnity escrow (limited to your equity injection in SBA 7a deals)

If the seller resists and wants 100% cash at close, that’s information. That's a red flag.

Structure discipline​
Whenever possible:

• Asset deals over stock
• Explicit exclusion of pre-closing billing risk/liabilities

The Rule You Should Remember

If a business:

• Depends heavily on government payers
• Shows unusually clean, predictable cash flow
• And can’t transparently connect revenue to real-world activity

You’re not early.

You’re late.

The Bottom Line

Most buyers don’t get hurt because they’re careless.

They get hurt because they rely on instinct when this requires process.

By the time a deal feels “obvious,” you’ve usually stopped asking the uncomfortable questions—the ones that surface this kind of risk before you’re committed.

So before you draft an LOI.
Before you negotiate price.
Before you start telling yourself it’s probably fine—

Here’s the exact pre-LOI screening tool disciplined buyers use to decide whether a deal in these risky industries deserves another hour of attention… or none at all.

Run it cold.
Run it early.
And if it fails, walk—without explaining yourself.

My Pre-LOI Screening Checklist For Billing Fraud:

STEP 1: Spot the Risk Early (Before You Get Invested)

Ask yourself—honestly:

• ⬜ What % of revenue comes from government payers (Medicaid, Medicare, state programs)?
• ⬜ Are margins meaningfully higher than industry norms?
• ⬜ Has revenue grown faster than:
  • headcount?
  • physical capacity?
  • operating hours?
• ⬜ Does cash flow look unusually smooth for a government-reimbursed business?

If this feels “too clean,” pause.
That’s often the tell.

STEP 2: Force the Numbers to Touch Reality

You should personally verify:

• ⬜ Raw, timestamped source data (not summaries)
• ⬜ Direct reconciliation between:
  • attendance / trip / patient logs
  • staffing schedules
  • inventory, mileage, or service capacity
  • billed claims
• ⬜ At least one site visit that confirms the business exists at the scale claimed

If the seller can’t show their work, assume there’s something they don’t want you to see.

STEP 3: Pressure-Test the Billing Engine

You should examine:

• ⬜ Whether 1–3 billing codes drive most revenue
• ⬜ Whether billing volume makes physical sense
• ⬜ Whether reimbursements arrive faster or more consistently than expected

Fraud loves repetition.
Legitimate operations don’t.

STEP 4: Treat Compliance History as Live Ammunition

You need to review:

• ⬜ Every audit, inquiry, clawback, or regulator email
• ⬜ Violations that didn’t interrupt reimbursement
• ⬜ Any licenses that were ever suspended, threatened, or conditionally renewed

If the seller says “it was resolved,” your next question is:

STEP 5: Follow the Cash (This Is Where It Breaks)

Look for:

• ⬜ Cash withdrawals that don’t map to payroll or expenses
• ⬜ Side entities with vague purposes
• ⬜ Wires, crypto, or “consulting” payments tied to billing volume

Billing fraud and tax problems almost always travel together.

If you’re seeing this in real deals, let me know.

DM me on X → @lawyer4smbs

Different deals.
Same playbook.

Stay safe out there.
—
Eric

Buyers Black Book