5 Warnings Signs to Look Out for When Buying a Business
Buying a business can be a very exciting prospect. It can extremely rewarding, both personally and professionally.
At the same time, there is always inherent risk with buying a business, just as there is with starting a business from scratch. The main difference between the two, of course, is the fact that you’ll be inheriting the successes — and issues — of the previous owner.
If you are looking to purchase a business, there are many things that will signal the potential of that company. There are also many things that signal a business may not be in a great position for you to purchase — and that troubled times could be ahead if you do.
The challenge is that uncovering these troubling items isn’t as easy as uncovering the positive signals. That being said, there are warning signs that you should look out for when you’re buying a business.
Here are 5 of them.
You Have a Bad Experience as a ‘Customer’
A business’ customers are the lifeblood of the company. Without them, there obviously wouldn’t be any sales to speak of.
It’s always been important that a company’s customers are happy with not only the products/services they’re purchasing, but also the service they receive. This has become even more important today, with customer experience driving a lot of customers’ decision-making process.
One way you can experience this for yourself is to do some secret shopping at a business you are thinking of buying. For a retail business, for example, you could enter the store and see what experience you get while shopping there. How did the employees treat you? Did you feel welcomed and appreciated? Did you have a good overall experience?
You can get a feel for this, too, through customer service phone lines. That would be effective for service-related industries.
One other tip is to check out the company’s online reviews. They could be a good indicator of whether the company has a good or bad reputation with their customers — and what challenges you’d might have to overcome as a result if you were to buy the business.
The Company is ‘Top Heavy’ in Customers
It’s always great to see a company have a lot of customers/clients. Businesses that have a long list are likely to tout this as a huge benefit if they’re trying to sell to you.
As a potential buyer, though, you need to dive deeper than just the total number of customers. Analyze the revenue breakdown by customer to see if the company is “top heavy.” In other words, is the revenue equally split among customers? Or is one customer — or a small group of customers — responsible or much of the sales?
If the 5% of the company’s customers are responsible for 90% of its revenue, this is a big potential warning sign. It’s a case of putting too many eggs in one basket. If you were to lose one or two of these “top heavy” customers, you could see your revenue plunge overnight.
Another warning sign in this area is whether the customer list is active. In other words, are they current customers? When was the last time they made purchases? Or, again, have a majority of the customers not made a purchase in a while?
There are Disgruntled Employees
Poor leadership often leads to a poorly-run business, and this often leads to disgruntled employees. If you’ve started to enter negotiations to buy a business, ask if you can speak to a few of the current employees.
Chances are that most of the employees you’ll be allowed to speak with are loyal to the owner, but there’s also a chance they won’t be. If there are employees who aren’t happy with the way things are, this could be a huge red flag.
Besides showing that the business could be poorly run — and have bigger problems you can’t forecast at the time you purchase it — it also means you may need an entirely new staff. The best situation for any business buyer would be if they could rely on the current staff to lead the way. If there are disgruntled employees, that might not work out.
The Company Has Poor Equipment
When you buy a company, the purchase price often includes the equipment it uses to run the operations. Only in very few instances does it not.
One huge warning sign when buying a business is if their equipment is old, outdated and needs to be replaced. If this is the case, your investment could get real expensive real fast.
If you have to replace a large chunk of the business equipment within the first year, for example, it could increase the amount of money you invested in the business substantially. While you should never expect the equipment you get from a business sale to be brand new, you don’t want it to be run down, either.
The Financials Don’t Line Up
This is perhaps the easiest warning sign to spot, which is why we have listed it last. During the due diligence phase of negotiations, the current owner should provide you with a plethora of financial documents. These will range from a balance sheet to recent tax returns to other supporting documentation.
If anything in these documents doesn’t match up, it could be a huge red flag. If the sales revenue on the balance sheet doesn’t match up with what the business claimed on their taxes, that could be a huge problem.
Make sure that when you’re reviewing the documents provided to you, that you cross-reference them against each other. Everything should match up perfectly. If there’s anything that doesn’t, you need to seek an explanation on why that is.
Our best advice? Don’t waste another day and talk to a Sunbelt South Florida broker today!
Sunbelt Business Brokers of West Palm Beach provides dedicated business brokerage services for all of your selling needs. Whether you are an established business owner nearing retirement and looking to sell, or an ambitious entrepreneur seeking your next investment opportunity, there is no reason to look beyond Sunbelt Business Brokers. Visit us at 800 Village Square Crossing
Suite 216 Palm Beach Gardens, FL 33410 or contact us at (561) 832-9222.