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What red flags should I look out for when buying a business?

Starting a business from the ground up can be difficult, so some people may be more interested in buying one. It could seem more manageable, but it can also be more complex considering the legalities needed to finalize the purchase. It can include various stages of negotiation and planning, all necessary to ensure the process happens the way it should.

However, when choosing which business to buy, the work begins before the purchase happens. It is like buying property, requiring careful evaluation and due diligence before vetting feasible options. Sometimes, the most surface-level investigation can reveal deal-breaking issues with the business. If you are scouting a company to buy, look out for the following red flags:

  • Issues with the business model, structure or operations – Numbers do not lie. This statement is true more so for businesses. Sales numbers and other data can tell significant information about whether the company has a notable problem.
  • Efforts to cover up the business’ reputation – An ethically sound and profitable business can often stand without flashy sales pitches or campaigns. A seller may take extensive measures to cover up any questionable affairs or incidents involving the brand. It is best to do research on the business before sealing the deal.
  • Inconsistencies in tax-related documents – Running a business is tough enough. Tax discrepancies can be more challenging to resolve, so reviewing tax documents is vital.

There is no such thing as being too thorough when doing due diligence. If there are problems in the business, they can transfer to the buyer as the new owner.

Knowing what to do about the red flags

Buyers can discuss these red flags with the sellers to find out more details about the situation and if there are ways to resolve them before initiating the purchase. However, some problems can be too big to overlook. If a buyer spots a red flag anytime during the process, seeking legal counsel can help them learn how to approach it and what to do next.