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When buying a business, you can’t afford to get caught up in the emotions of the process and you certainly can’t close your eyes to anything. Each and every “angle” must be open, analyzed and carefully considered. Failure to do so can lead to a bad investment which eventually returns to bother you.
As you do your analysis and due diligence, there are some red flags that you need to keep on high alert. They don’t necessarily mean you can buy the business, but they do raise suspicions. In this article, we will explain what they are and why it is best to avoid them
For this reason persevere keep an eye out for red flags
Most businesses fail. That’s just the cold, hard truth. Research shows that 20% of businesses fail within the first year, while about half collapse by the five-year mark. A decade later, only one-third of the business is still open. So, even though the first few years have passed since the business you are interested in purchasing, there are still some challenging times ahead. Avoid making things more challenging by keeping an eye on the following red flags and warning signs.
Related: 10 Questions You Must Ask Before Buying A Business
1. Decrease in sales statistics
The decline in sales figures is not a problem in isolation. (Sometimes they give you leverage to buy business at a lower price and then come up with some simple solutions to bring the revenue back to normal). However, if there is a long-term trend, dig something to find out why.
For example, let’s say these are quarterly earnings for the last two years:
YR 1, Q1: 1 million
YR 1, Q2: 2 million
YR 1, Q3: 3 million
YR 1, Q4: 1 million
YR 2, Q1: $ 750k
YR 2, Q2: $ 600k
YR 2, Q3: $ 500k
YR 2, Q4: $ 350k
A quick look at these numbers shows that something is very wrong. This is more of a minor problem. There is a fundamental problem with the business model or the market. Even if you can buy a business with a fair valuation, there should be a big question about whether you can turn the business around. This can be a situation where the factors at play are out of your control.
2. High pressure selling pitch
A good company’s reputation and balance sheet speak for themselves. There is no need for a huge sales pitch from the seller. If anything, they should have leverage, fielding offers from buyers.
If you’re on the receiving end of a high-pressure sales pitch, ask yourself why that might be. Chances are, the seller wants to unload the business quickly. There may be valid reasons for this, but there may be some concerns.
Related: 4 things to understand when buying a business
3. Behind the tax
Do not accept a company’s internal finances at face value only. Look at the tax files for the last three years (at least) and make sure they are consistent with what is being reported in the company’s financial statements. If the numbers don’t add up, or smell something funny, investigate it carefully.
4. Questionable past
Look outside the balance sheet and financial. You also need to consider the company’s brand and industry presence.
One of the easiest things to do is run a Google search for the company name and study the first few pages of results. Read everything you can to get your hands on it. These include blog posts, social media posts, news stories, photos, videos, reviews, testimonials, independent rating sites, founder interviews, and more.
When you do your research, note some of the negatives. This can be as simple as a one-star review for a product or as serious as a legal matter. Because the thing here is: once you buy the business, all the problems of the previous owner become yours immediately. It doesn’t matter if someone is involved with the business when someone wrote a disgusting review or article, it will follow you. This is not necessarily the basis for No. Buy a business, but it will give you a break to evaluate more carefully.
Related: The Benefits of Buying a Business vs. Starting Your Own Company
Never underestimate the importance of hard work when acquiring a business. Although this verification process may seem rigid and irresistible, it is an important part of the process. Not only will you discover the proverbial skeleton in the closet, but you will also find hidden benefits and bright spots that you weren’t hiding before.