Buying a business can be a great opportunity and investment, but like all investments, it comes with risks.
A company may look profitable on the surface, but hidden issues can turn it into an unwanted financial burden. Identifying red flags early can help you avoid costly mistakes and ensure you’re making the right decision.
Whether you’re a first-time buyer or an experienced investor, knowing what to look for can save you from legal, financial, and operational headaches.
1. Inconsistent or Misleading Financials
A business’s financial records should provide a clear picture of its performance. If the numbers don’t add up or seem too good to be true, that’s a major warning sign.
What to Look Out For:
- Unverified Revenue Claims: Inflated sales figures or inconsistent profit margins.
- Hidden Debts: Outstanding loans, unpaid taxes, or supplier disputes.
- Cash Flow Problems: Frequent late payments or irregular income patterns.
How to Spot It:
- Request Full Financial Records: Ask for tax returns, profit and loss statements, and balance sheets from the past three years.
- Compare Projections vs. Actuals: Review sales forecasts against real revenue.
- Check for External Audits: A lack of independent financial verification is a red flag.
Next Steps:
If financial inconsistencies arise, dig deeper before proceeding. Work with an accountant and legal expert to uncover potential risks and understand Stamp Duty implications. If the seller cannot provide transparent records, reconsider the purchase.
2. Legal Liabilities & Disputes
A business may appear successful, but hidden legal issues can cause major setbacks. Unresolved disputes, regulatory breaches, or poor contract management can create financial and operational risks for the buyer.
What to Look Out For:
- Outstanding lawsuits: Pending or past legal disputes with customers, employees, or suppliers.
- Unclear Employee Agreements: Confusing documentation, or informal arrangements
- Unfavourable contracts: Long-term agreements with restrictive terms, high penalties, or unclear obligations.
- Regulatory non-compliance: Missing licences, workplace safety violations, or breaches of Australian Consumer Law.
How to Spot It:
- Conduct a legal review: Check for ongoing or past lawsuits and assess contract obligations.
- Verify compliance records: Ensure the business meets industry regulations and licensing requirements.
- Request supplier and employee agreements: Identify any restrictive clauses, misclassified contractors, restraint clauses or inaccurate contracting that could impact operations
Next Steps:
Seek legal advice from our contract lawyer to assess the severity of any liabilities. If risks are manageable, negotiate contract revisions before proceeding. If disputes or compliance issues pose significant threats, consider walking away.
3. Unfavourable Lease Agreements
A business’s location and lease terms can significantly impact its profitability. A restrictive or costly lease agreement can lead to financial strain, operational limitations, or unexpected liabilities.
What to Look Out For:
- Long-term obligations: Lease agreements with extended terms and limited exit options.
- Hidden costs: Unclear rent increases, maintenance fees, or unexpected financial responsibilities.
- Transfer restrictions: Clauses that prevent lease assignment or require landlord approval to transfer the lease.
How to Spot It:
- Review the lease agreement: Look for termination clauses, rent escalation terms, and renewal conditions.
- Assess location flexibility: Check whether relocation or expansion is possible under the lease.
- Confirm landlord conditions: Ensure the lease allows for ownership transfer without excessive restrictions.
Next Steps:
Our lawyers can review the lease to identify any risks. If the lease terms are unfavourable, negotiate better conditions before finalising the purchase. If restrictions limit business flexibility, reconsider the investment.
4. Outdated or Non-Transferable Licences & Permits
Many businesses require licences, permits, or regulatory approvals to operate legally. If these are expired, non-transferable, or subject to compliance issues, the buyer may face delays, fines, or even be unable to run the business after purchase.
This issue is particularly relevant in hospitality, construction, healthcare, retail, and transport, where strict industry regulations apply. For example, a restaurant may have an active liquor license, but this may be issued in the owner’s name rather than the business entity.
What to Look Out For:
- Expired or soon-to-expire licences: Business operating permits, industry certifications, or health and safety approvals that need renewal.
- Owner-specific licences: Permits issued in an individual’s name rather than the business entity.
- Regulatory non-compliance: Outstanding fines or failure to meet licensing requirements.
How to Spot It:
- Review all required licences and permits: Check expiration dates and confirm they align with industry regulations.
- Verify transferability: Determine if the business licences can be legally transferred to a new owner.
- Check for compliance history: Look for fines, warnings, or revoked licences that indicate past issues.
Next Steps:
If a business has licensing issues, clarify the renewal or transfer process before finalising the purchase. We can help you explore the regulatory requirements and ensure all permits are valid.
5. Dependence on the Current Owner
If key relationships, knowledge, or operations are tied to a single person, the transition could lead to customer loss or operational challenges.
This issue is more common in service-based industries where clients build relationships with the business owner, such as consulting firms, medical practices, and boutique agencies etc. If the clients do not transition to the new owner, the business could lose significant revenue.
What to Look Out For:
- Owner-driven customer relationships: Clients rely on personal connections with the current owner.
- Lack of documented processes: Operations, supplier management, or sales strategies are not systemised.
- Limited employee decision-making: Staff depend on the owner for critical business decisions.
How to Spot It:
- Assess customer retention risks: Check how much revenue comes from owner-managed relationships.
- Review operational documentation: Ensure there are clear systems, SOPs, and training materials.
- Interview key employees: Determine whether staff can manage daily operations without the owner’s involvement.
Next Steps:
If the business is overly reliant on the current owner, negotiate a structured transition period where they remain involved in training and relationship handovers.
To protect the business from client poaching, include a non-compete or non-solicitation clause in the sale agreement. This prevents the former owner from taking clients or starting a competing business in the same industry. If no clear transition plan or legal protections are in place, the risk of losing key clients may outweigh the benefits of the purchase.
Protecting Your Investment
Buying a business is a significant investment, and identifying red flags early can prevent costly mistakes. Conducting thorough due diligence ensures you understand the financial, legal, and operational risks before signing a contract.
Having a clear legal and financial strategy before committing to a purchase is a must. This is where professional guidance makes a difference.
Book Your Free Consultation Today
At Arcuri Turnbull Law, our business purchase and sales lawyers specialise in helping business buyers understand their legal risks and make informed decisions. Our team reviews contracts, identifies risks, and advises on legal protections, such as lease negotiations, to safeguard you and your investment.
Before making a purchase, consult our team of business lawyers to ensure you’re making the right investment. Book your complimentary 30-minute consultation to discuss your business acquisition today.
