Buying a business: What red flags do I need to be aware of?

There are many things to consider when purchasing a business, and all aspects need to be assessed thoroughly before taking the next step towards acquisition. Evaluating how well the company in question fits with your existing portfolio and strategy, its reputation and size, and its ability to boost your revenue down the line are all factors that need heavy consideration.

However, what also ought to be addressed is the number of red flags the potential acquisition raises during the evaluation phase. How easy is it to find information about the company? What is the state of its financial records? How is it performing within the industry?

Below we will explore five red flags you should be wary of when conducting your checks prior to the acquisition, for they can make or break the final deal.

Poor financial records
Gaps in a company’s financial statements are definitely red flags, because they indicate that something is amiss from the records or that something does not add up. You should be reviewing statements for at least the last three years, and noticing issues with the company’s outstanding debts, borrowing history or even complicated profits, mean that more investigation is required.

Get a second opinion if you are unsure of your own review; it may even be worth enlisting the help of an external advisory firm to conduct a review of their own. Above all, be certain of your final judgement as an acquisition with false or missing financial information is a sure-fire way to entertain more red flags down the line.

Difficulty finding information
A lack of transparency from a business is yet again a sign of something bad, as it should be the case that all information is disclosed during the acquisition process. Normally, information is obtained from the owner or the managing directors themselves, but their unwillingness to disclose certain details about the business can create a negative feeling around the acquisition, especially if it comes without an explanation.

The list of questions you should be asking should be thorough and direct, and can help flag up any issues about the business from the get-go.

Reputation and performance
Research is a key element of the acquisition process, and it is during this time that the red flags may start popping up. In particular, pay close attention to the reputation of the company and its performance within the market.

A bad reputation is hard to shake, and can impact your business as a whole if it is adopted via an acquisition. See what the online reviews of the company are like, and speak to customers about their satisfaction with the product or services offered, and gauge from there how that might impact your portfolio in the future.

Similarly, its reputation and financial situation can influence its prominence and performance in the industry; conversely, a declining industry may even deter you from entering the marketspace through a takeover in the first place. It is imperative that you carry out thorough market and industry research to ensure that you are fully aware of the business you are looking to purchase, and the environment it is in to see if it aligns with your existing portfolio.

Unhappy staff
A company’s backbone is its staff, and having unhappy employees is a definite red flag. Perhaps there is an issue with contracts, or working hours, or pay, or even morale amongst the team. Prior to taking on a business, it is vital that you dig deeper to understand what is causing tension and discontent amongst staff members, and find a way to address the issues. Otherwise, you may be left with more stress than necessary in the long-term.