3 warning signs not to buy a business

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3 warning signs not to buy a business

Brad OConnor

Jul 29, 2021

Purchasing a business is a big decision, and one that should be made carefully. There is a lot of due diligence required before you sign anything, to ensure that this large purchase is a safe, smart decision. Here are 3 warning signs that you can look out for when you are buying a business!

1. How honest is the current owner?

Honesty is an important quality in a business owner. Unfortunately, not everyone is, and it can be hard to tell if someone is lying. There are a couple clauses and agreements that you can ask the current owner to sign that will help protect you against any shady deals. One of these is a disclosure agreement. This requires the current business owner to share key information pertaining to the business. Some things to ask about might be any debt, lawsuits, issues with vendors, issues with employees, or any other current issues that you think are important. Ensuring that you are as informed as possible will help you avoid any scary surprises after you sign the deal.

2. Funny finances

If the business financials do not add up, that is one of the biggest red flags you will find in a business deal. When you look into your potential new business’ financial records, it is a good idea to go back at least three years, but five is best if you can. Be sure to compare the company’s internal financial records with tax files, and make sure that all the numbers line up. As soon as there is a discrepancy, that is a sign of some shady dealings, and a warning sign that you should not buy this business. You should also review the business’ tax returns, to make sure that they are up to date with their taxes. Pay specific attention to sales tax; some businesses under report their income to avoid paying higher sales taxes. Conducting a thorough examination of the financial records is complicated, consider hiring a CPA firm to conduct the audit to be certain that no issue gets missed.

2. Old/broken equipment

When you are conducting your research, be sure to take a look at all of the equipment that is included with the business purchase. Inquire about the age and inspect the quality of equipment. Old, poor quality or broken equipment can be very costly to replace, and you do not want to be unpleasantly surprised after the purchase is complete Another aspect to consider when it comes to equipment is ownership. Does the business own the equipment they use, or is it leased? Ownership is typically the better option, so there is no concern about having to make payments. The bottom line here is to ensure that you will not have to repair or replace the equipment right after you purchase the company.

Buying a business can be an incredibly fulfilling experience if done properly, but it is important to be careful and do your research. Have any questions about purchasing a business in Manitoba? Contact our office today, we would love to hear from you!

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EVALUATION/CONSULTATION

If you are a business owner considering selling a business, and would like to learn more about OConnor Business Brokers and Consultants and the services we offer, please contact us to arrange a confidential business evaluation.

You will meet one of the Directors of OConnor Business Brokers, and your requirements will be discussed. During the meeting you will have the opportunity to find out more about selling a business, and how our business brokers and M&A Advisors can assist you with the business sale process.

Unlike many other approaches, OConnor Business Brokers start without any preconceived ideas about what is right for you and for your business. By understanding the business and your motivation we can help steer you in the right direction. This often challenges conventional thinking and comes as a refreshing change to the norm.

The Directors of OConnor Business Brokers have experience as business brokers, business consultants, M&A advisors, and business owners. We understand the challenges and pressures that face a business at any one point. We therefore use our time together not to try and sell you our services but to help you understand your options and how we can help.

An initial meeting lasts approximately one hour, and can take place virtually or in person at our office.

Evaluation and Consultation Request

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