Buying a Small Business: Warning Signs to Look For

There are many advantages in buying an existing small business, such as access to ready inventory, clients and employees. But there are some risks that aren’t obvious - and they can pose serious problems if ignored.

It is better to examine any business purchase deal in great detail before you make a firm decision.

Pending Tax Liabilities

You should go over the tax accounts of the business with a fine-toothed comb.

Find out if the seller has any pending tax liabilities or if he or she has been slapped with any penalties by the relevant tax authorities. Your tax attorney should scrutinize all the past records of the seller so that you do not get stuck in any tax issues.

It may be very difficult to locate the seller if he or she moves to another country after you purchase their business.

Change in Target Audience

Before you buy a business, you should also find out if the business’ clientele has undergone any changes in age or tastes. If the business has a physical location, you also need to find out if there is a new shopping zone that might have been sanctioned in the neighborhood.

Do not accept the seller’s reason to sell the business at face value; instead, do a little snooping around in the neighborhood to find out if there are any drastic changes that could be in the pipeline.

You can also contact the local zoning office to inquire about the status of the neighborhood.

Survey Your Competition

You should also conduct a survey to find out about the local competition before buying a small business. Find out their numbers, their strengths and weaknesses and their pricing strategy.

Find out how well the seller has been able to cope with such competition. It is entirely possible that the seller may have been out-priced out of business – and if you do not have an alternate plan of action, then you might meet the same fate.

Get Information from Existing Clients

If possible, try to contact the business’ existing clients and get some feedback regarding the quality of products and services that were provided. If a customer is unhappy for any reason, you need to find out why.

If the issue is minor and can easily be fixed then you probably don’t have a reason to worry. But if the reputation of the seller and the business is not good at all, then you should avoid purchasing it.

It is better to start afresh rather than to try to repair the tattered reputation of a dubious business.

Seller’s Net Income

Also before purchasing a business, you should also get the net income figures of the seller, which is the amount that the seller manages to save after clearing salaries, expenses, taxes and paying suppliers.

Compare the recent figures with previous ones. Check to see if there has been a decline. If there has been, then it could indicate that the business is deteriorating steadily.

Don’t base your calculations on gross sales figures alone – give more importance to net income figures.

Even though the business and the seller might seem genuine, it is always better to cross-check all the figures and to also engage in some discreet snooping to unearth any hidden facts that the seller may not have disclosed.

If you come across any of the above warning signs, then look for another business to buy or start your own company.

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