People who have bought a business will probably tell you it’s the most important and largest investment decision they ever had to make in their business life. It might seem like a gamble, as a buyout can either give you financial freedom or destroy your financial future. It all depends on how you go about it.
From years of experience in buying out companies and growing them, Fundnd has discovered some alarming warning signs. If these signs can be detected sooner, business buyers might be in a position to save millions of dollars.
Most often, you’ll find that no one wants to sell a performing business. Why would anyone? When a company is running properly, providing cash flow, profits, and the owner is free to work whenever they want, it makes no sense to sell. This means that whenever a business is on sale, as a prospective buyer, you should have your senses up and alert. Although the business could be on sale for legitimate reasons, it is important to investigate deeper and know why the business is being put on sale.
To avoid the disappointment of paying too much for a company, here are some red flags to look out for.
There’s Insufficient Financial Information
If the business owner is not forthcoming with the financial records, you have a reason to get suspicious. The person selling a business to you should be ready to answer all your questions in relation to the financial accounts, profit and expenses for the company. There are times when business owners decide to hold back important information like bank records, customer lists and recent history of sales. Fundnd advises buyers to beware if they feel that the seller is not being completely honest and upfront in providing this information.
Poor Customer Reviews
Relying wholly on customer reviews is not a good idea, as they can be biased. However, they are important in helping a researcher gauge customers’ opinion about a company. Customer reviews are an effective way of getting an overall conclusion as to whether the market is happy and satisfied with the products and services offered by the business.
Should you notice a pattern of poor customer reviews, this could be a clear warning sign that the customers are not happy and may be glad to move to competitors. If you find that this is the case with the company you want to buy, Fundnd recommends that you bring this to the attention of the seller in a bid to find out the possible reasons and whether it can be easily rectified. It can be challenging to reverse a poor customer’s review once it’s on the internet.
Bad Credit Rating or Tainted Borrowing History
According to Fundnd, one of the most essential things to look out for when considering to buy out a company is their credit status. To do this, conduct an online credit reference check on the business. In the report, you might discover that the business doesn’t pay its suppliers on time or there are many pending legal actions against the business. In such a case, you don’t want to purchase that business as it will only get you into lawsuits or financial problems.
To avoid such situations, it is crucial that you delve into any current or outstanding warranty issues as no one wants a huge bill of warranty claims after buying a business. Also, make sure you have all outstanding warranty claims quantified and signed off by the previous business owner.
If Your Gut Instinct Tells You So, Don’t Buy
If it doesn’t feel okay, it probably just isn’t. We all have a way of smelling a rat and it would only do you good to trust your instincts if you are suspicious of a deal. After helping many clients purchase their first business, Fundnd says the biggest warning sign comes from your gut.
Buying a company can either be the most distressing or the most exciting experience of your life in business. There is just too much at stake for you to go about the decision blindfolded. Think about your financial future and the future of your family before taking the plunge. Be keen to follow Fundnd’s list of red flags and hopefully you’ll land the perfect deal.