Due Diligence – The warning signs when buying a business.

You are considering buying an established business. The ideal business for you is one you think you will enjoy. It interests you and you have experience in the industry. And of course – the business is profitable. When you eventually find a business that ticks the boxes, it is easy to get carried away with excitement. However, as part of your due diligence process you need to remain vigilant for warning signs that the business might not be what you are looking for.

Following are signs that the business you are looking at buying might not be the one for you:

  • The figures you have received do not correlate with tax returns or Business Activity Statements.

This often indicates cash is being received but not being declared. This makes it almost impossible to verify the true position of the company. Any figures provided should support those on the tax returns and business activity statements. You should also check that all tax obligations are up to date.

  • Customer numbers and/or turnover are declining rapidly.

The past three years of financial statements should be reviewed. Any downward trend in turnover or customer numbers needs to be thoroughly reviewed. The number of customers and expenditure per customer is critical and there is always a risk if the business is highly reliant on just a few clients.

  • There are predictions that the industry is moving into a period of struggle.

What is the outlook for the industry? Reports are available from companies such as IBISWorld who can provide an overview of the outlook for each industry. You also need to consider the outlook for the region where the business is located. For example, if you are purchasing a business in a country town, what is the population trend of the town?

  • The sellers do not disclose important information to you.

This should ring the alarm bells. You need to understand why a seller is keeping important information from you. If the seller continues to refuse to provide important information, then you should walk away. This can also apply when the sellers will not introduce you to important contacts such as suppliers, landlords and key employees.

  • The sellers will not agree to you having a trial period in the new business, or they won’t allow you due diligence in your examination of what you might be buying into.

This can occur when the sellers are keen to close the deal quickly. Your due diligence is critical, and it needs to be performed thoroughly. You should not agree to the sale without completing your due diligence.

  • There are legal proceedings involving the business.

You will need to understand the proceedings and the potential damage it can cause the business (reputation, further legal proceedings) including any monetary settlements. Legal proceedings are usually a deal breaker for potential purchasers.

Don’t ignore the warning signs. You only get one shot at making the correct decision and you should not be afraid to walk away from the purchase.

Talk to your Accru Adviser today to see if you’re up to date.

About the Author
Martin Rush , Accru Perth
Martin’s hands-on approach to understanding his clients’ needs enables him to find the best possible solutions for them. His approach builds trust and has enabled him to forge many long-term relationships over his 20-year career. Martin Rush joined Accru Page Kirk & Jennings in 1993 after completing his Bachelor of Business degree. He was promoted to partner after 12 years with the firm. His professional experience includes three years working in London with the National Audit Office and Audit Commission.
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