Hello Searchers,
I am a new searcher, recently joined this forum and wondering if y'all looked into potential red flags for small, sweaty startups.
Please tag me with your answer so I don't miss out.
Please don't DM as this could be good public knowledge.
TIA!
What are potential red flags for searchers acquiring small businesses?
by a searcher from University of Mumbai
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1) Have revenues been declining, consistent or just saw a short-term bump. When revenues are inconsistent or declining, you need to be sure you can get your arms around why and that it won't be an issue going forward.
2) How involved are the sellers in managing and generating the revenue for the business? There are businesses out there where in just about all aspects the business is the owner. If that owner leaves, so may the business. Either because it is highly technical and requires that owner's expertise of because that owner really holds all of the relationships. So you want to be sure that the owner can be replaced.
3) Does the business require licensing and can you get that licensing easy enough or have someone else to handle that license? Lenders want to be sure that there will be a license going forward to operate the company.
4) What are the add-backs and are they realistic? We see many brokers include add-backs that are pretty much impossible to back up are true add-backs and not necessary operating expenses for the company. Some examples are adding back random cost of goods sold, office supplies, or other categories that are not typical add-backs, travel & entertainment, meals, etc. You need to be sure the cash flow works without these add-backs,
5) Verifying the accuracy of the financial information provided. Sometimes the business is relatively simple and you can request bank statements and verify this on your own. However, we usually recommend for larger deals or businesses with any complication that you get a QofE done.
I hope this helps. Happy to discuss other items at any time at --@----.com Thank you and again good luck with your search.