Red Flags When Purchasing a Business

Purchasing a business is a process that you want to make sure you have a clear understanding of and legal guidance through. With the right amount of research and know-how, you can successfully sidestep one of the trickiest parts of the industry: actually forming a new business. However, without the proper precaution or the ability to spot some business deal red flags, you could soon realize that you have made a mistake with massive financial repercussions.

To avoid such an unfortunate outcome, take a look at this brief list of what our Raleigh business attorney from Hopper Law Firm consider to be the biggest and most common red flags out there. Of course, if you have additional questions or know you need business law support now, you can contact us online or call 800.705.8950 to schedule a consultation.

Watch Out for These Warning Signs

  1. Sinking ships: There is an old sailor's tip that if you see rats leaving the ship, it is taking on water in the lower decks and about to sink. Your purchase agreement should include a disclosure clause that allows you to access all the relevant information, especially the financial data, for the business you are about to purchase. If you find that revenue has been decreasing steadily or the employee pool is shrinking, it might be unsalvageable, even with your own best efforts.
  2. Discretionary income: Speaking of money, how much is the owner taking home at the end of the fiscal year? If they cannot afford to cut themselves a good paycheck, the business might be struggling. On the other hand, if they are making a sizeable sum every month, you may need to ask, "Why are they leaving this stability behind?"
  3. Changing times: Every business sells something. Make certain the one you are buying is selling something that can stand the test of time. In the digital, internet age, you need to be particularly conscious of products that will be brushed away by technology. Consider this: 15 years ago, everyone rented from Blockbuster.
  4. Defects: A business is only as good as the building it is in and the equipment it uses. If it looks like you'll need to spend thousands out of your own pocket to get your storefront or office back up to usable condition, you might not be making so good of a deal as you first thought.
  5. Taxes owed: Uncle Sam always gets paid his dues. A business that is behind on its taxes will fall into some debt to the IRS. If you buy that business, the debt is on your hands, not the previous owner. When you uncover tax debt in a business, you should either ask that the amount be reduced from your buying price, or get out of Dodge.
  6. Bad reputation: In the world of business, you should give a darn about your bad reputation. If the previous owner has made a bad name for their business, you are going to inherit it automatically. Previous clients and patrons won't care that the business is under new management; one bad experience lasts a lifetime as long as that business name exists.