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  • Gabriella Ferraro

Five "Red Flags" to look out for when buying an established business

Written by Catherine Micallef

Purchasing an established business can be a great way to enter the world of entrepreneurship. Some advantages of buying an established business in comparison to starting a new business include, the initial set up costs of the business have already been paid and completed, licences and registrations may be in place and branding may be established. However, it is important to be aware of the risks and red flags when considering buying an established business.

1. Lack of Financial Transparency or Refusal to Provide Financial Information

Prior to purchasing a business, it is important to complete due diligence, including reviewing the financial records of the business. If a vendor is hesitant to provide financial records or the records are incomplete, it may be a sign that the business is not as it seems. Be sure to review tax returns, income statements and cash flow statements and ensure that they are prepared by a certified accountant. If a vendor is unable to provide these records, it may be best to avoid the purchase.

2. An Untrustworthy Vendor

If the vendor seems untrustworthy or is not forthcoming with information, it may be a sign that something is askew. Be sure to research the vendor and the business thoroughly before making any commitments.

3. Negative Customer Reviews

If a business has a history of poor customer service or negative reviews, it may be difficult to remove this stigma post settlement. It is important to be aware of the shortcomings of the business and assess whether the market is content and satisfied with the existing business.

4. Poor Secret Shopping Experience

If possible, visiting the place of business as a potential customer will provide valuable insight into the day-to-day operations of the business and into customer relations. It also provides an opportunity to see how busy the business is and how the staff present themselves and behave towards customers. This could be formalised in a trial period if you do decide to proceed with a purchase, but it is a good opportunity to assess the business before any commitment is made.

5. Lack of Proper Legal Licences and Certificates

It is important to ensure that a business has all the proper licences and certificates. Your local municipal council can advise on the relevant permits and certifications for the permitted use at the premises. At settlement, these would be transferred to you. Failure to have the proper legal documentation can result in fines and other legal issues in the future.

Purchasing an established business can be a good opportunity, but it is important to be aware of potential red flags before making a purchase. By taking these steps, you can make an informed decision and avoid potential problems in the future. You can also better assess a fair purchase price for the business.

Please note that this advice is general in nature, if you have any specific enquiries about purchasing a business or require a business contract to be prepared or review, please contact one of our experienced commercial lawyers on (03) 9311 8911.

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