So far in this series to date, we’ve discussed financial and people-management red flags or warning signs when acquiring a business.
Using caution and realism is essential for any entrepreneur, as not all businesses are created equal. There are opportunities (if rare) where the seller will look to gloss over concerns to ensure a quick sale.
To secure your best interests, today we’re going to take a look at red flags you might spot in the product or service offering.
Whether this is your first rodeo or your tenth, looking for signs of concern will save you heartache down the line.
Inconsistent quality
One of the primary red flags in a business’s product or service offerings is inconsistent quality or performance. You might notice a shift in customer reviews—dropping from 4 or 5 stars to one-star feedback. There might be trouble retaining customers, ongoing complaints, or consistent refund requests. Aim to look for patterns (good and bad) when assessing if the business juice is worth the squeeze. Discuss these with your business broker, other advisors, or, if possible, the existing owners. There may be interwoven concerns like manufacturing delays, changing supply lines, or logistics issues. These may or may not be things you’re looking to address once you take ownership.
Questionable product/service offering
All businesses must learn to adapt and adjust depending on market demands. This means constantly evolving your offering to suit the customer of today. Businesses with offerings that don’t seem to match current market trends is a noticable red flag. It might be technology becoming obsolete or a marketing angle that’s now known to be false. Even a highly protracted service menu can feel confused, rather than refined and focused.
A stagnant offering may suggest the owners aren’t invested in long-term growth or success. They may not have kept up with market research or changes in consumer expectations. You don’t want to be left holding the “bag” with more problems to fix than opportunities to grow.
The overplayed hero offering
There’s also a red flag if a business relies on one single product or service to shoulder all its revenue. Diversification and evolution, as we’ve touched on earlier, are key to business success at any size. If a business only looks one way for revenue, it risks market fluctuations and rising competition.
Some unique businesses corner the market with one niche product and rarely need to diversify. This is increasingly rare. Most businesses need multiple strong offerings to succeed. Assess the diversity of the product or service offering, and the talent behind this service. For example, if a video company relies on one editor, they’re at risk if that person leaves. They could quickly become beholden to one single employee for content delivery.
IP and licensing concerns
When considering an acquisition, look for the red flags in the business IP portfolio—trademarks, copyrights, patents— ensure they’re properly managed. Keep an eye out for licensing disputes or legal issues that could follow you post-sale. Look for safeguards to protect the business’ IP assets now and in the future. This is especially important for specialised offerings that give you a genuine market edge.
Unsustainable pricing
Big-ticket or budget-priced services and products can seem impressive—but are they realistic? If a business overcharges or undercharges, it will impact their ability to grow and sustain success long term. Look out for owners relying on aggressive pricing or cost-cutting to make ends meet each month. This can quickly lead to a ‘race to the bottom’ that’s hard to recover from. Do a market pricing analysis to understand where the business sits and how that affects their revenue performance.
Acquiring an existing business can offer numerous advantages, so it’s essential to do the right research before you make an offer. By being your own ally and investigator, you’ll not only steer yourself in the right direction, but learn valuable business lessons for your future acquisitions by keeping away from these red flags.
