Conducting research when buying a business

Before buying a business, you should look out for any potential issues that may affect your purchase.

The reason for selling the business

Find out from the business owner why the business is on sale. If they don’t want to disclose this information, this could be cause for concern.

If the owner’s reason to sell the business is related to financial problems, you may want to reconsider the offer. See make sure a business is worth buying: due diligence.

Financial situation

The financials of the business are one of the most important indicators that will help you determine if your investment is safe.

It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants and solicitors. See legal and financial checks when buying a business.

Credit scores and outstanding debts

Lenders won't be willing to finance a purchase that represents a high level of risk so if the business has financial problems, you probably won’t be able to get a loan.

You want to make sure the business you purchase is free of debts. Using a credit agency will provide you with access to databases with up-to-date financial information. You can find out the credit-worthiness of a business with Equifax or Experian.

Employee turnover

High employee turnover indicates underlying problems, such as poor employee management, a negative work environment, poor salaries, or difficulty attracting and retaining good employees.

Employee satisfaction is key, as they are going to be your support in the business following the transaction. See factors affecting staff turnover.

Business model structure

You should be aware of the overall structure of the business. The reasons behind the apparent success of the company may be tied to the owner rather than good management of the company.

Although the company may have enjoyed stability, it might not be prepared for future changes in the industry. You need to analyse whether the foundations of the company are solid, even when you take some factors out of the equation.

Condition of included assets

You need to know exactly what assets are going to be included in the business acquisition.

You should look carefully at the condition of the physical and intangible items of your purchase.

Company reputation

Look into the reputation of the company and the general opinion of customers towards it.

You can gain a better understanding of how people see the business by looking at Google reviews, social media posts, testimonials, and other sources.

Legal issues

A company that has past legal issues may not be the best option when buying a business. There may be some underlying issues that are not so easy to spot.

Consider the help of a solicitor to ensure the company you are about to buy complies with required licenses and regulations, collection of customer data according to UK General Data Protection Regulation, and has its contracts in place.

Trustworthiness of owner

If an owner is un-cooperative, or reluctant to disclose information about the business, this could mean they are withholding information that could affect you.

Another cause for concern is when the business owner puts pressure on you to close the deal. They should give you a proper amount of time to carefully conduct due diligence and examine every detail of the business you are about to purchase.

If you have encountered one or more of the issues above, it doesn’t necessarily mean that you shouldn’t go ahead with the purchase. However, you should analyse your options and obtain legal advice. See choose a solicitor for your business.