Red Flags to Look Out For Before Buying an Existing Business

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When buying another business, regardless of its size, it is vital to conduct thorough due diligence to ensure that the business is sound, conforms to legal requirements, and is overall a good investment for the buyer. Unlike starting your own business, which presents several unknown risks, the acquirer of an existing business has access to a plethora of information that provides a snapshot of the health of the business, and at the same time, should serve as a warning sign when things seem awry. What are some of the signs that potential buyers should look out for when assessing a target business?

Financial statements. When reviewing financial statements, be sure that the numbers make sense. Omissions of key documents is an obvious red flag. For example, the business’s tax filings should correspond to financials for each year. Similarly, make sure that the business provides you with all relevant financial information. If they hesitate to provide tax information, that is a cause of concern. Financial information for as much as the past five years should be readily accessible to a prospective buyer.

Taxes and regulatory filings. Tax statements are necessary to verify the company’s financials, but they also must be obtained for the purpose of ensuring that taxes have been properly paid. If the taxes have not been paid fully and in a timely manner, the new business owner will be liable for outstanding amounts. This is especially true with businesses that routinely under report sales tax. Similarly, be sure that the business can easily produce its regulatory filings and that these documents are timely and properly filed. If the necessary certificates have not been obtained, the business could be subject to penalties or more serious consequences.

Equipment and infrastructure. Any signs of faulty infrastructure or nonfunctional equipment can seriously undermine the value of the transaction for the purchaser. When a purchaser must spend considerable capital to replace or repair equipment at the initial stages, then he has less immediately available funds to contribute to other business needs. In addition, if the equipment is not owned outright, the purchaser should carefully review the equipment’s leasing terms.

Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.

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Red Flags to Look Out For Before Buying an Existing Business

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