5 Red Flags Sellers Don’t Want You to Spot - Bizail

 

You might not make it or break it with your first investment, and yeah it is scary and exciting at the same time. But as an experienced business buyer,you want to play your cards right. Don't go into a deal too quickly, make sure you've covered everything about the company for sale –. And I don’t mean simple stuff such as profit, sales and expenses. There’s so much more to it that might sneak up on you after the sale is done. I’m going to break down in this quick article 5 red flags of buying a business that you would never have suspected to check out and/or ask about!

 

Don’t Be Misled – Ask All the Right Questions!

 

Before we get to the red flags, I want to share some reasons why sometimes it’s ok to be that annoying buyer who asks a million questions. You know, sometimes you might have an ideal opportunity, everything looks great, the location is perfect, even the numbers are amazing. You’ve spent your life savings into it but one must understand that buying a business is just the first part. You’ll still need still some money saved up to keep the company running after the purchase is complete— from basic stuff like setting up a corporation, to purchasing more inventory, etc. so you don’t want any problems popping up right after you aquired the business.

 

Red flag #1: Landlord Selling the Property

 

This happens more often than you think, but it is very avoidable. Suppose you have just bought a busy gas station, and after you buy it, you sign a 10-year lease with the current landlord. A year in, your landlord sells the property, and now you have a new landlord while you are left wondering, “Will the new landlord keep the gas station after my lease expires? Will they renew it? Will they hike my rent?”

While you can’t stop the landlord from selling the property, there are steps you can take to protect yourself. For example, you could negotiate a 5-year lease renewal option to extend your lease when it expires or even request a right of first refusal. This gives you the first opportunity to buy the property if it goes up for sale, helping to secure your investment in the long run. It’s a smart move to ensure stability, especially with an essential location like a gas station.

 

Red flag #2: Customers Tied to Seller’s Relationships

 

If you acquire a brick-and-mortar location, the chances of losing customers due to personal relationships with the previous owner are slim. However, for businesses like routes for sale, especially independent distribution routes—for example, a route that sells snacks and cakes to small businesses—this risk is more real. In this scenario, you’re buying pre-packaged items from a wholesaler, and the route comes with 50 accounts. But slowly, you notice customers are buying less, and some stop ordering altogether. Could it be that these customers were only supporting the previous owner due to their personal relationships?

This can be a tough situation, but asking for "proof" of customer loyalty before buying the business isn't exactly practical, right? However, there are ways to spot this potential issue. Look for patterns among the customers, like whether they share a common language or cultural background with the seller, which could indicate personal ties. Also, review receipts or sales records as far back as possible to understand their purchasing habits.

Don’t get me wrong, this isn’t necessarily a bad thing. One way to protect yourself is by negotiating a period during which the customers are expected to stay on board after the sale, giving you time to build relationships and stabilize the business.

 

Red flag #3:  Negative Online Reviews

 

Buying a new business is always exciting, especially when everything looks great—the sales are strong, the profit is solid, and the location is prime. But after the deal is closed, you start digging deeper into the online presence and stumble upon terrible reviews. This can quickly become a nightmare, as those negative reviews can haunt your business even as the new owner.

It’s crucial to check the online reviews before purchasing a business and understand why they’re there in the first place. Are the issues related to customer service, product quality, or something else? By identifying the root cause, you can address the problem head-on and start implementing solutions that turn those reviews around. Ignoring them could harm your reputation and make it much harder to build a strong relationship with your new customers.

 

Red flag #4: Outdated Furniture and Equipment

 

This is important, but not necessarily a deal breaker—it can, however, cost you after buying a business. When purchasing a business that comes with FF&E (Furniture, Fixtures, and Equipment), it's great to have these assets included, but remember, you're taking over someone else’s equipment. You want to ensure that all of it is now owned by you and in good working condition. The last thing you want is to buy the business only for the equipment to start breaking down a few months later.

To avoid this, have a trusted handyman or technician inspect the equipment before closing the deal. If any issues are found, you can request the seller to fix, replace, or deduct the cost of repairs from the asking price. This proactive step helps protect your investment and saves you from costly repairs after the purchase.

 

Red flag #5 : Key Employees Leaving

 

Do you need to fully understand the business before buying one? It’s certainly a good idea, but learning a new industry isn’t always overly complicated—unless it’s a trade-based business, like plumbing, where you need proper training and certification. Let’s exclude those for now. Imagine you're buying a restaurant. The deal includes the staff, and customers are already familiar with the head cook and the team. It sounds perfect, until, right after the purchase, your head cook gives you their two weeks’ notice!

This can be a big shock. While you can’t force the cook to stay, it’s something that could have been avoided by confirming their intentions with the seller beforehand. A quick check-in on the key staff’s future plans can save you from a sudden disruption.

Also, after acquiring the business, it’s crucial to build strong relationships with your team, especially the cooks. Make them feel valued and excited about growing with the new ownership. Keeping your key employees happy can be the difference between smooth sailing and major headaches after the takeover.

Buying a business is often considered the American dream and can be a key path to financial freedom. However, it’s important not to overlook red flags during the process. Take your time, ask the right questions, and hire a lawyer to ensure everything is handled properly. Do everything in your power to make sure your investment is secure, and that all aspects of the deal are clear and transparent. A careful approach can help you avoid potential issues down the road and set you up for long-term success.