There are two ways to start or grow your business. The first is to do it on your own from the ground up. The second is to buy an existing business. This carries many advantages, but there are also many pitfalls—you are buying the baggage along with the operations. However, what are the warning signs that your business deal might not be as solid as you had hoped? Learn these major red flags and warning signs when purchasing a business which indicate you may want to think twice before moving forward.
Purchasing a Business
Purchasing a business can be a great way for an aspiring entrepreneur to get up and running fast. You are getting a ready-made operation with a supply chain, customer base, staff and establishment all ready to go. All you need to do is step in and take over. However, how do you know that the business is solvent and a safe bet? Check for transparency, current climate and environment, equipment and facilities, seller interactions and tax issues.
Does the money match up? Are the books clear, easy to understand and is everything accounted for? Go through the accounting files and books with a fine-toothed comb and address any issues that do not seem to add up. Try to go back at least five years if you can. Anything that is not clear or transparent could be a red flag.
What factors have led to the sale of the company? Are there big-box competitors moving in which will make it a lot harder to stay solvent? Are there major future developments in the works? Is the landlord looking to double the rent due to perceived property value increases? Make sure that the climate for the business is and will remain stable before you buy.
Equipment and Facilities
Does the business have major issues with the facilities? Is the roof leaking and in need of repair? Is the equipment severely outdated or broken down? Is this investment going to cost you thousands in repairs as well as the sale of the business itself? If so, there might be a reason the prior owner could not afford the upkeep.
Make sure that the taxes and debts for the business are clean, clear and up to date. The last thing you want to deal with is a tax lien on your brand new business. Review the tax returns over the past half-decade to be sure that everything is solid. Remember, along with the business, you are taking on its debt.
How honest with you is the seller? Do they try to hide things in the records that are unclear? Do they practice transparency and honesty? This is vital. If they are not honest with you, then it is highly unlikely they were honest in other dealings.
If you need help with the purchase of a new business, a solid business law attorney can help. Read about our business law services, and call us to get a consultation today.