When it comes to red flags when buying a business nearly all buyers expect it to come up in some form of black & white whether that’s the financial statements or graph of business trends. Maybe they think it will be over stated inventory on the balance or an increase in customer concentration among — and those are legitimate red flags, but there is another one.
While those examples may have some risk, they can also have logical and quantifiable risk.
So what is it? Family. Family of the seller working in the business.
Right from the get go you know that you’re going to have to replace these employees because while family employees may stick around for a bit, it usually goes south very quickly as they don’t like working for and being held to the expectations of a professional employer. And then there’s the reality that their roles and responsibilities are often under compensated – so you’re gonna have to pay more to other employees to replace them. Those two factors are very hard to quantify and value and just make family employed in the business, family of the seller, a huge red flag.
Other red flags when buying a business…
- Deferred Maintenance or Neglected Assets
- Overdependence on Key Individuals
- Perfect Customer Reviews
- Unresolved Legal Issues
- Deteriorating Customer Base
- High Adjustments from Net Income To SDE.