Red Flags to Watch Out For When Buying a Business

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Red Flags to Watch Out For When Buying a Business

Buying a business can be an exciting, if not daunting, opportunity. After all, the buying process can be a lengthy one and it’s important that you carry out all the right checks before agreeing to the sale. In our latest blog, we take you through some of the red flags that you should be looking out for when buying a business.

You must know the signs of something not quite going to plan. Buying a business is a huge commitment and you should feel confident that you have made the right decision. So, here are some of the top red flags to keep an eye out for:

  • Trouble finding out information
  • Poor financial records
  • Staff aren’t happy
  • Business reputation
  • Industry performance 

Trouble Finding Out Information

When it comes to buying a business, you will no doubt get most of your information from the current owner. In most cases, owners will be happy to provide you with answers to your questions about the business and the sale. 

However, if you are finding a lack of transparency when it comes to details about the business, this is a massive red flag. There is usually a reason why the owner won’t disclose information, and unless they explain it to you, this could create a huge negative aspect to the sale.

It’s important to know which questions you should be asking when buying a business, as this can help you to dig out any skeletons that the owner may be trying to hide. 

Poor Financial Records

Looking at the financial records is one of the most important steps in buying a business. If something doesn’t quite add up, this is a definite red flag. Whether it’s an outstanding debt, poor borrowing history or profits look a little complicated, make sure you look into this more. 

Make sure you are looking at the last 3 years of records at least, and consider having an external company look at the financial records. Many businesses will conduct their own financial review, but if you’re not confident, it’s always worth getting another opinion.

The Staff Aren’t Happy

If you have visited the premises, either as a customer or a prospective buyer, it’s worth remembering how the staff acted. Did everyone seem content, or was there tension and stress amongst the team? Did any staff members look particularly unhappy?

This can be a huge sign there is something wrong within the business and requires a little more digging before you commit to buying. After all, it could be something you’re able to fix once you own the business, or it might be a persistent problem that could cause you a lot more stress than necessary. 

Business Reputation

When buying a business, it’s important to do some of your own research. What are the online reviews like of the business you’re attempting to buy? Do customers generally seem happy with the service, or is it the opposite? 

A bad reputation can be very hard to reverse and it may affect your decision to buy. Try to understand where the reputation has come from, and if it’s something you’re still willing to take on. If the business has a good reputation, this is a perfect start to buying a business.

Industry Performance

So, the business looks in a good position with the financial records and reputation, but what about the industry as a whole? Is the industry doing well, or is it on the decline? This could be a reason why the owner is selling, and it’s important to be aware of. 

Carry out research on where the business might be in the next 5-10 years, and look at the competitors to get a better picture. A failing industry could be due to several reasons, such as new technology making the business obsolete. It’s key to know these things before buying a business. 

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