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The idea of purchasing a business from someone else is alluring. Entrepreneurs understand how to start a business from scratch, but many underestimate the risks involved in buying an existing company. Without enough research and forethought, it’s easy to wind up purchasing a colossal dud.
However, that doesn’t mean it’s impossible to find a great buying opportunity. Online business brokers, have lots of prime companies listed for sale.
Further, what may seem like a poor business opportunity at first could turn into the deal of a lifetime. Here are the most common red flags that could be actual goldmines.
7 Red Flags That are Actually Great Buying Opportunities
1. Suspect Reason for Selling
Business owners never sell their companies on a whim. There are many reasons companies go up for sale. For instance, the owner might be ready to retire.
Sometimes, business is booming, and the owner just wants one final payout before exiting. Others may be nervous about a competitor moving into the area and worry they will lose customers.
It’s up to the buyer to determine if there’s any merit behind the owner’s reasoning. Buyers can use the owner’s reason for selling as a price negotiating tactic. It may even turn into a blessing in disguise.
For example, if the owner wants to retire, maintaining the current customer base should be relatively easy. That will help save money on marketing. Competing with a similar business could even encourage the buyer to drive sales through better offers and superior customer service.
2. Shady Financial Status
Once an entrepreneur purchases a business, they are also responsible all of its financial obligations. A potential buyer should investigate the company’s financial statements thoroughly before making a deal.
Never take the owner’s word at face value. Instead, compare all internal financial documents against past tax returns.
It’s also wise to audit the accounting department to ensure there aren’t any outstanding invoices. If there are unpaid bills, determine if the company has enough working capital to repay them.
Knowing any financial pitfalls will help the buyer during the negotiation process. Too many outstanding bills should make it easier to demand a lower selling price.
Getting the business for a steal will provide enough wiggle room to take control of the finances. Working with the accounting team to cut unnecessary spending will also keep more money in the buyer’s pocket.
3. Costly Repairs
Just like most home buyers wouldn’t make an offer without seeing the property, entrepreneurs shouldn’t purchase a business without touring the premises. If the seller hesitates to schedule a tour, it’s crucial to find out why.
They may be hiding something they hope a potential buyer won’t see. During a showing, be sure to inspect everything. Is the equipment outdated or inoperable?
Does the building need costly repairs? Answering in the affirmative will cost money upfront, but that doesn’t mean buying the business is a bad idea.
Repairing the facility will improve employee morale and reduce turnover. Upgrading the equipment will streamline production and increase revenue over time.
To offset these costs initially, the buyer should negotiate a lower selling price. This will free up capital and make it possible to transform the current business into a highly lucrative one.
4. Low Customer Reviews
Thanks to the internet, it’s easy to find customer reviews for nearly every business out there. Before making an offer, be sure to see what former and current customers have to say about the company. Never rely only on the brand’s own website for reviews.
Instead, check out third-party platforms, such as Yelp or Google, for completely unbiased reviews.
Is there a lot of negative feedback? Don’t run away from the deal just yet. Rebranding could entice former customers to come back and draw in a new audience.
Since rebranding can be a long process, the buyer should demand a reduced price before taking over the business. After an effective rebranding, customer satisfaction surveys will improve, and the company will start making a lot more money.
5. High Turnover Rate
Buying a business also means acquiring its current employees. How many of these workers are happy to be there? Always inspect a company’s employee records before making a final deal.
These documents show how often workers are terminated or quit. A high turnover rate may indicate unhappy employees or mismanagement.
A high turnover rate is a red flag, but it’s a fixable one. Since it costs an average of $4,000 to onboard a new employee, retaining existing talent is a must. It’s possible to improve morale through team-building exercises, better communication, and transparent management.
A new owner should prioritize company culture to demonstrate that every team member is a valuable asset. These tactics will create loyal employees who will help drive sales and increase company profits.
6. Discretionary Earnings
How much cash flow is left after calculating all expenses? This amount is known as discretionary earnings, and no, it’s not always the profit or loss reported when filing taxes.
Many business owners run expenses through the business that aren’t necessary for daily operation. Anyone looking to buy a business should analyze the company’s discretionary earnings before making an offer.
Revenue alone doesn’t always paint a clear picture of a company’s success. For example, a decrease in discretionary income could suggest issues with sales and profits. Instead of running away from the deal, it’s time to negotiate a lower price.
The right buyer should view these financial discrepancies as a prime opportunity to reduce expenses, improve accounting procedures, and boost overall revenues.
7. Market Trends
The world is constantly evolving, and companies thriving today could become a thing of the past tomorrow. That’s why it’s vital to perform plenty of market research before buying a business.
This type of research lets prospective buyers see things from the consumer’s viewpoint. It shows what works and what needs improvement. Being educated about current and forecasted market trends will help a prospective buyer make a smart deal.
Examine how the industry is performing in the area. Is there still a need for this type of product or service? Finding direct competitors in the area is a good sign.
It indicates there is still plenty of consumer demand. The goal is to entice customers into the doors. With the right marketing plan and some old-fashioned hard work, the right buyer can transform the business into a money-making machine.
Negotiate These Red Flags
When browsing businesses for sale, prospective buyers are bound to run into a few red flags. However, that doesn’t mean it’s time to write off these companies.
It may be possible to turn these warning signs into lucrative opportunities. Negotiate to buy a company for a lower price today and you could make a fortune in the future.
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