Many people would assume that buying a business is much easier than starting a business from scratch. In some regards this may be true; however, buying a business comes with its own risks and potential pitfalls.
Recently, the Denver Business Journal featured an article with five “red flags” to watch for when buying a business that could indicate that the deal is going to turn south. The red flags include:
1. Buying from an owner who turns out to be dishonest. As soon as you catch the owner bending the truth, you can pretty much assume that he or she has fibbed about other details about the business or sale as well.
2. Changes that could lead to serious competition or worse. Do some investigating to find out if the business is about to face competition from a new big box store that is opening up or new developments that could supersede the business.
3. Equipment that is old and needs to be replaced. Replacing outdated equipment can get very expensive quickly, so make sure that you have an accurate picture of the investment that will be required.
4. Financial information that doesn’t add up. Take a deep dive into the business’ financial records -- or find someone else who can -- so that you can uncover any potential problems, especially with taxes.
5. Unpaid taxes. Even if the former owner is the one who didn’t pay accurate taxes, you are the one who will be on the hook with the IRS once you take over, so make sure that taxes for at least the past five years are paid in full.
As you can see, some of these red flags just require following your intuition, while others require you to dig in a little deeper. An experienced business law attorney can be your biggest asset when it comes to making sure that all of your bases are covered before jumping into something as important as buying a business.