Buying a business is one of the most significant decisions you may make in your life. There are many advantages to purchasing your own company, but there are also some potential pitfalls. You want to make sure you are investing your money in a viable company that will thrive and provide you with growth potential. When you are considering the purchase of an established business, there are some red flags to look out for before you sign the agreement.
- Financial Problems: One of the primary considerations when you purchase a business is the financial health of the company. You need to obtain the financial and IRS tax records for the business, but that is not enough. You will want to perform your own financial evaluation to ensure that the information you are getting is accurate. If you find any discrepancies, it may mean that the owner is trying to hide some financial issues and that is a major red flag in the potential purchase of the business.
- Old or Faulty Equipment: When a company has cash flow problems, it may avoid spending the necessary funds to maintain and update their equipment. Have a professional come in to complete a detailed inspection of any equipment and evaluate the maintenance records. You certainly do not want to take over a company only to find out that you will have to replace expensive equipment in order to operate properly.
- High Employee Turnover: Review the employment records to determine whether there is a high turnover rate. When employees leave regularly it is likely that there is something wrong with the business model, pay rates, benefits, or management. Some industries, such as restaurants, have an inherently high turnover rate, which is considered normal. According to the Bureau of Labor Statistics, the average turnover rate in 2020 was 57.3%.
- Poor Management: Poor management is one of the reasons that a business may not be performing as well as it should. Spend some time reviewing the daily operations of the business and look at the policies and procedures in place. If the business owner does not want to give you free access, it could mean they are hiding something. Remember that even if you come in with excellent management skills and techniques, it may not be enough to save a failing business that is on the decline.
- Competition: A business is always growing and evolving. There could be some competitors that are strongly vying to take your share of the marketplace. You want to review the competition and determine the future outlook of the business. There could be local companies or online businesses that are competing for the same share of customers. It is also helpful to make sure that the current owner or employees do not plan to take their knowledge and other information (and customers) with them to start a new company.
These are just a handful of the issues that could be red flags when buying a business. Your own gut or intuition is useful in finding red flags. Always seek help in drafting a fair agreement when you purchase a business, and review a contract in depth before you sign the document. To learn more about business purchases, contact our lawyers at Moen Sheehan Meyer, Ltd. by phone at (608) 784-8310 or by email to schedule a consultation.