Updated: Jan 8, 2020
Buying a business will probably be the most critical and most substantial investment decision you will ever make in your working life. It may seem like a gamble, either giving you financial freedom or destroying your financial future.
From our years of experience in undertaking due diligence work for potential business owners, we have unmasked some alarming warning signs. If they were caught sooner, potential buyers would have saved a fortune.
We have a belief that no one sells a good business. Why would you? If a company or industry is running well and providing cash flow and profits — and the owner is not required to work 70-90 hours a week — then why sell it? The fact that a business for sale is a warning sign in itself. There could be legitimate reasons, but you must delve deeper to separate fact from fiction as to why the business is for sale.
Don't want to buy a rotten business? There are 6 warning signs to watch out for:
1. The Business is in A Dying Industry
It is not worthwhile purchasing a business in an industry that has plateaued or is in decline. Typical brick and mortar businesses in the retail space are struggling at the moment, and I would certainly advise anyone to look carefully before they purchase such an undertaking.
It may be the main reason why an owner is trying to sell. They had had a good run over the last five to 10 years when the industry was buoyant, and now with the emergence of eCommerce, they are struggling to grow that business. Do your research on where the industry is going in the next two to three years. Your self-verification includes closely monitoring any existing and potential competitors in the space.
2. The Seller Refuses to Disclose All Financial Information
Get suspicious when the business owner is not forthcoming with the financial records or does not answer all your questions concerning the financial accounts, profit, and expenses for the business. Sometimes business owners will hold back crucial information such as bank records, customer lists, and recent sales history. If you feel the seller is not being completely upfront and honest with you in providing this information, then beware.
3. Poor Credit History in Credit Records
Do a comprehensive credit check on the business via buyer agents or accountants. The report will disclose whether or not the business pays its suppliers on time, and any pending legal actions against the business. The last thing you want is to purchase a business only to get a stack of lawsuits served to you.
Make sure to delve into any current or outstanding warranty issues for products. You don’t want a massive bill of warranty claims after you purchase the business. Get all outstanding warranty claims quantified and signed off by the owner. Ask for a reduction in the purchase price if the expired warranties are significant.
4. The Business Depends on A Few Customers
Few customers contributed to large shares of income is another warning sign that most potential business owners neglect. Does the business rely on a few large customer accounts? You run the risk of a significant downturn in sales and profit if you lose just one of these considerable customer accounts. Trawling through the customer list will reveal any warning signs here.
5. Unpaid Employee Entitlements and Tax Debt
Request from the business owner information about taxes and unpaid employee entitlements. Make sure that these are entirely up to date and that there is no outstanding tax or unpaid entitlements to staff.
You could be on the verge of half your staff walking out after the purchase simply because they have unpaid wages and entitlements that date back to before you became the owner. Also, request a business tax report from the tax authorities and check for any amount outstanding. Any unpaid taxes will be revealed in this report and will send your alarm bells ringing.
6. Bad Buying Experience
Do your surveillance and snoop around. Visit the place of business as a potential customer, and gauge for yourself the following:
Customer service levels
Cleanliness and state of disrepair
General business activity
A quick walk around the business premise with your eyes open will reveal vital warning signs that aren’t obvious from just eyeballing the financial accounts. Is the place busy with a steady flow of customers, or are there no customers insight? Are staff keen and enthusiastic to assist you, or are they bored and passive? Does the business look clean and well maintained or run-down and tired? Nothing beats, opening your eyes and ears and pretending to be a potential customer. It can reveal a lot.
Are You Looking at Buying A Business?
Failure to conduct proper due diligence is the most common issue that we see that leads to costly problems for the new owners of the business. Any prospective business owner must engage with qualified accountants and solicitors who will work side-by-side with the client to guide them through the business acquisition process. Ensuring that due diligence is conducted thoroughly before the final decision to purchase the business is paramount. Doing this will reduce the risk of making common mistakes and improve the likelihood that the business will succeed in the future.
We can help prospective business owners navigate through the process of buying a business, ensure that the risks associated with purchasing a business under the management, and you don’t pay too much, or make costly mistakes. To discuss how our accounting services can help you, get in touch with our experienced advisors for a free consultation via 02 9585 8388 or here.