10 Warning signs to look for when buying any business that could ring your Alarm Bells!
Buying a business will probably be the most important and largest 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.
I have a belief that no one sells a good business. Why would you? If a business is running well and providing cash flow and profits — and the owner is not required to work 60-80 hours a week — then why sell it? The fact that a business is being sold 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 overlook the opportunity, a true Entrepreneur will see how they can turn a lot of these Negatives into Positives provided you have the skills and the asking price is negotiable!
To avoid the heartache of paying too much for a business, there are 10 warning signs to look out for.
- 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 in relation to the financial accounts, profit and expenses for the business.
- Loss of interest in the last 12 months
Most business owners do not sell a business overnight. It is a decision they have made over time, and after they’ve chosen to sell, it may take considerably more time to find a buyer. Once they have reached this decision, most business owners refuse to reinvest any more money into the business to improve or to grow it.
- The business is in a sunset industry
It may be the main reason why an owner is trying to sell. They have had a good run over the last 5-10 years when the industry was buoyant, and now with emergence of e-commerce, they are struggling to grow that business. Do your research on where the industry is going in the next 2-3 years.
- Secret shopping wasn’t pleasant
Do your own 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 key 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 in sight? 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.
- Poor customer reviews
Research the web to really gauge customer opinion. While customer reviews can be one-sided, you will need to get an overall feel as to whether the marketplace is happy and satisfied with the existing business.
- Disgruntled key staff members
If possible, talk to some of the key employees within the business. You are going to rely on them in the next 12-18 months to help educate and assist you in the transition phase of the business, so you certainly want them to stick around for that period of time.
- Poor credit rating and borrowing history
Do an online credit reference check on the business. In the report you will discover whether the business pays its suppliers on time and whether there are any pending legal actions against the business.
- The business relies on a few customers
This 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 major customer accounts. Trawling through the customer debtor list will reveal any warning signs here.
- Unpaid tax and employee entitlements
Request from the business owner information in relation to taxes and unpaid employee entitlements, or Liabilities on Balance Sheet. Make sure that these are completely up to date and that there is no outstanding tax or unpaid entitlements to staff.
- Your gut instinct tells you so
Among all the warning signs discussed so far, go with your gut. Trust your instincts. If enough things just don’t stack up, then walk away.
“After walking away from many possible Sellers or helping many Buyers purchase that right business, I still find that the biggest warning sign will come from my gut feeling; if it doesn’t feel right you are probably RIGHT “. Adrian Coyne