Buying a business is not a decision you have come to lightly. In fact, the decision to purchase a business is only the beginning of the process. Before signing on any dotted lines, a savvy entrepreneur must do their research. When doing this research, you need to be mindful of certain red flags. However, when researching businesses to purchase keep in mind that some red flags you may see in businesses for sale can be turned into opportunities for success. Below are 7 red flags that could be opportunities when buying a business:
1. Owner’s Discretionary Income
The owner’s discretionary income is the amount of revenue the owner is making after business expenses. Although a business’s revenue may look consistent, if the discretionary income has been decreasing over time, this can reflect overall problems with sales and profits. This can be an opportunity for you if you decide to purchase the business to lower expenses, improve accounts receivable turnover and decrease uncollectable account expenses.
2. Reason for Selling
It is within your rights to ask an owner why they are selling their business. On top of that, it is also within your rights to determine the accuracy behind their reasoning. In order to do so, look into recent developments. Has a competitive business just recently opened nearby? Is the owner just ready to retire or burnt out in that industry? You bring a fresh perspective to the business and with that new ideas that could make the business stand out among competition.
3. Broken Equipment
This is not as obvious as it sounds – but, it is important. Before entering negotiations, ask for a tour of the premises. Does equipment look broken or outdated? If so, consider the added costs of repairing or replacing them, which could affect how much you believe a business is worth. If equipment needs to be replaced, you want to find out if there is room to negotiate on the asking price with the seller. Additionally, consider the increased efficiency you will have with new equipment. Understand how many months or years the increased revenue will pay off the equipment and depreciation expense.
4. Customer Reviews
Does the business you are looking to purchase have Yelp or Google reviews? If so, dig deep into the customer reviews. What are customers saying about the management and staff? Do people seem enthusiastic and loyal? A business that needs rebranding will take more work than one with an established positive reputation. But, there is certainly opportunity in rebranding a business after a sale if it is known that there are new owners and if you can show customers that you are taking time and effort to make changes.
5. Employee Turnover
When looking into records, find out how often employees are terminated or quit. This will speak to the workforce in the area, in addition to the management staff on payroll. If employees are unhappy, there might be something wrong with the company’s culture. Like rebranding to improve a company’s reputation, the sale of a company can be a sign of positive changes to come for company culture and employee satisfaction. If handled properly, as soon as you begin operating the business you can make it known that the company culture is a priority and that the employees are valuable assets.
6. Financial Statements
This is incredibly important! Take a close look at the financial statements. Compare the internal statements with local and federal tax returns to ensure accuracy. You should be able to notice areas that you can improve on in financial statements by focusing on expenses, sales and accounts receivable.
7. Market Trends
Finally and equally as important as researching the business, do some market research. Take a look at the industry as a whole, in addition to the local area. How well has the business and industry been doing for the last few years? Does it look like it will continue to grow? How is the competition? If there is a lot of local competition – that’s great, it’s a sign that there is demand for your product or service and there is a big opportunity to stand out. If there is little competition locally, determine if there is a demand for what the business is offering and think about how to increase demand in your area. Look at what other similar businesses are doing and what sets them apart from that business.
If you see any of these red flags when you are looking for a business to purchase, don’t count them out immediately. Consider the opportunities that they present and how you can turn the business into a success. Also, all of these factors could drive down the price and give you the opportunity to buy low and someday sell high!
When looking into purchasing a business, no matter the industry, ask an experienced broker from Transworld Business Advisors for assistance. With industry-specific advisors and an arsenal of businesses for sale, the hunt is simplified with professionalism and expertise on your side. Contact your local Transworld today for a consultation!