5 Pitfalls to Consider Before Buying a Business

Posted on Aug 31 2015 - 5:18am by Lance Edwards
Evelyn Ivy

Evelyn Ivy

BY EVELYN IVY (Via EzineArticles)ā€” Before venturing into buying a business you should have decided that entrepreneurship is the right path for you. If you are not sure, you will bail at the first sign of trouble. Buying a business is a great way to venture into entrepreneurship because it comes with an immediate income stream. However, if you do not know what to look for, you could end up losing your pants in the deal.

Five pitfalls to watch out for:

Too much dependence on a key employee

The key employee could be the owner or another employee. When the business is too dependent on a few people, the probability of losing the business when these people walk out is high.

The business is in a declining industry

The business owner might be trying to get out because he or she knows sales is declining. Do your research to make sure the industry as a whole is not in decline. A decline in industry revenue might mean the pending death of the business.

The reputation in the local market

Before buying a business, talk to locals and customers to see what they think about the business. If the business reputation has been damaged, it will be difficult for you as a new owner to turn that around.

Financial risks

The owner should have clean books. If the books are not well maintained it will be hard to determine how profitable the business really is. Be sure the business owner has filed all payroll, federal, state and local tax returns to date. If the seller owes lots of back taxes, you will need to address this first. Your business could be closed down if taxes are not paid in a timely manner.

Labor market risks

Replacing employees will be very difficult if the business is in a specialized market and there is not a ready stream of potential employees. This could slow down your business if you ever lose an employee. Also, watch out for high employee turnover as this could indicate bad management. While, this problem can be fixed, you need to be aware of the potential downside of that risks.

There are other factors to watch out for but this article has only focused on five. The bottom line is if you choose to venture into entrepreneurship by buying an existing business, you need to know what you are doing. You will also need to hire a good team of experts to work with you. Some experts you will need on your team are, a good accountant, lawyer, and a business broker.