Red flags when buying a business

Before buying a business, there are a huge array of factors to be considered and assessed. Does the company fit with your portfolio and strategy? What kind of reputation does it have? Will it boost your revenue once it has been integrated?

These are all among the things you’ll need to consider, but you should also be on the lookout for red flags which could suggest deeper seated issues that might not be immediately apparent. Here are four potential red flags to be wary of when conducting due diligence on a potential acquisition.

Poor record-keeping
If there are gaps in a company’s financial accounts, then this is a definite red flag, indicating either that mistakes have been made or that there is something amiss. During due diligence, you should be looking at accounts for at least the past three years.

If there are issues with the firm’s outstanding debts or borrowing history, or even profit/loss figures that raise questions, then you’ll need to investigate further.

If you are unsure, then it is worthwhile getting a second opinion from an external advisor. Ultimately, you’ll need to be certain before proceeding with an acquisition, so getting to the bottom of any irregularities in a company’s financial records is absolutely vital.

Difficulty tracking down information
During due diligence, there is expected to be a degree of openness between a potential buyer and the target company. While the company will of course not want to reveal everything until the process is more advanced, an overall lack of transparency is a sign that something may be off.

If an owner or managing director is unwilling to reveal important information about the business, especially without explanation, this could mean that something is amiss. Developing a detailed, thorough set of questions to ask (all pertaining to relevant information that you would expect a seller to disclose, of course), can help to flag any issues and enable you to gauge whether the company is seeking to hide anything.

Not all of the potential red flags will come from the company itself. A business may be run in a perfectly above board way and still display warning signs that might dissuade you from proceeding with an acquisition. A key thing to look out for is the company’s reputation among its clients, customers and partners.

Getting a good idea of how the company is viewed from the outside by those most closely associated with it will be vital to gaining an understanding of its reputation and status within the industry. So, speak to the company’s partners and clients about their dealings with the firm and also aim to find out how it is viewed by its customers (looking through online reviews on sites such as Google is a great way to do this).

Are the staff happy?
Staff are the backbone of a company and unhappy employees are one of the biggest red flags out there. Employee dissatisfaction can come from any number of sources and, if staff at a potential acquisition are unhappy, then you’ll need to find out where this stems from.

There may be a legitimate reason, of course. For example, if the company has been going through a protracted sale process that has spread uncertainty throughout the workforce. Or maybe the company is for sale because it has been struggling, something that will almost inevitably result in staff becoming unhappy and dispirited.

If either of these are the case, then it is possible that morale will improve considerably once a sale has been completed and the company has more stability. However, it may be that employees are unhappy for more deep-seated reasons, such as working hours, conditions, pay or issues with contracts.

These are harder problems to resolve and point more towards mismanagement than any external factor. If there is a culture within the company of undervaluing, neglecting or mistreating employees, then this is one of the biggest red flags out there and may prove harder to resolve if you do proceed with a deal.