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The 4 Biggest Red Flags to Look for When Buying a Business – Entrepreneur

Signing out of account, Standby…

If you are thinking of becoming an entrepreneur by acquisition, keep these critical due diligence red flags in mind when trying to find the skeletons in the company closet.
When buying a business, you can’t afford to get caught up in the emotions of the process, and you certainly can’t turn a blind eye to anything. Each and every “corner” must be exposed, analyzed and carefully considered. A failure to do so could lead to a poor investment that eventually comes back to haunt you.

As you do your analysis and , there are certain red flags that should put you on high alert. They don’t necessarily mean you can’t buy the business, but they do raise suspicions. In this article, we’ll explain what they are and why it’s best to avoid them.

Most businesses fail. That’s just the cold, hard truth. Research shows that 20% of businesses fail within the , while roughly half have collapsed by the five-year mark. After a decade, only one-third of businesses are still in operation.

So, even though the business you’re interested in purchasing has made it past the first couple of years, there are still some challenging times ahead. Avoid making things more challenging than they have to be by keeping an eye out for the following red flags and warning signs.

Related: 10 Questions You Must Ask Before Buying a Business

Declining sales figures aren’t a problem in isolation. (Sometimes they actually give you leverage to be able to purchase the business at a lower price and then make some easy fixes to return revenue back to normal levels). However, if there’s a long-term trend, do some digging to find out why.

For example, let’s say these are the quarterly revenues over the past two years:

YR 1, Q1: $1 million
YR 1, Q2: $2 million
YR 1, Q3: $3 million
YR 1, Q4: $1 million
YR 2, Q1: $750k
YR 2, Q2: $600k
YR 2, Q3: $500k
YR 2, Q4: $350k

A quick glance at these numbers shows you something is very wrong. This is more than a small issue. There’s a fundamental problem with the business model or the market. Even if you can buy the business at a fair valuation, there should be bigger questions about whether or not the business can be turned around. This might be a situation where there are factors in play that are outside of your control.

A good company reputation and balance sheet speak for themselves. There’s no need for a huge sales pitch from the seller. If anything, they should be the one with the leverage, fielding offers from buyers.

If you’re on the receiving end of a high-pressure sales pitch, ask yourself why that might be the case. Chances are, the seller wants to unload the business fast. There could be valid reasons for this, but there could also be a few concerns.

Related: 4 Things to Understand When Buying a Business

Don’t just take a company’s internal financials at face value. Get your hands on (at least) the past three year’s tax files, and make sure they’re consistent with what’s being reported on the company’s . If numbers don’t add up, or something smells funny, carefully investigate it.

Look beyond the balance sheet and financials. You also have to consider the company’s brand and industry presence.

One of the easiest things to do is run a search for the company’s name and to study the first several pages of results. Read everything you can get your hands on. This includes , social media posts, news stories, images, videos, reviews, testimonials, independent rating sites, interviews with founders, etc.

As you do your research, make notes of anything negative. This could be something as simple as a one-star review for a product or as serious as a legal matter. Because here’s the thing: Once you buy the business, all of the previous owner’s problems instantly become yours. It doesn’t matter if you weren’t affiliated with the business when someone wrote a scathing review or article, it’s going to follow you around. This isn’t necessarily grounds for not buying a business, but it should make you pause to perform an even more careful evaluation.

Related: The Benefits of Buying a Business vs. Starting Your Own Company

Never underestimate the importance of rigorous due diligence when acquiring a business. While this vetting process can feel strenuous and overwhelming, it’s a vital part of the process. Not only will you unearth the proverbial skeletons in the closet, but you may also find hidden benefits and bright spots that you weren’t previously privy to.

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Amid the AI hype, don’t forget about no-code

No-code startup Softr, which allows its customers to build apps from their existing data, announced Tuesday that it has added Google Sheets to its integration list.

Previously, Softr focused on Airtable databases. Its move to support data from Google’s spreadsheet product likely expands its potential customer pool. Even before that expansion, CEO Mariam Hakobyan told TechCrunch+ that her company grew its annual recurring revenue 3x from December 2021 to December 2022.

 

Softr’s quick revenue expansion is a good reminder that while the tech world seems completely consumed by all things AI, there’s quite a lot of work going on in other areas that are worth keeping an eye on.

That said, there is an interesting connection between AI and no-code worth writing down: Both are potentially great expanders of human capability. AI tooling could operate as a second brain of sorts for the digitally busy, and no-code services may allow nondevelopers to build the tools they need to complete their work. In both cases, the genres of new tech development have a shot at helping regular folks do a lot more, more quickly and often at a low cost.

Something else that modern AI tooling and no-code share is accessibility. Softr, for example, grew its base of signed-up users from 35,000 to 150,000 in 2022. That’s really quite a lot for a service that was, until recently, Airtable-specific. On the AI side, I don’t need to reiterate just how much market demand there is for modern LLM tooling.

Let’s dig into Softr’s progress since we last covered the company and chat about what we can learn about no-code progress as a method of building more accessible software.

Softr, no-code and empowering the regulars
Ask anyone who works at a company that builds software and isn’t part of the engineering or product orgs how long it will take them to get something built for their own needs. Without even making Jira ticket jokes, we all know what the answer will be. And to a degree, the standard situation makes sense: What nondeveloper employees need is often pretty basic software, and expensive engineers need to focus on the company’s core offering not internal tooling.

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Twitter’s legacy blue checkmark era is officially over

Twitter appears to have officially killed off its legacy blue checkmarks, one of the last remaining vestiges of the pre-Elon Musk owner era.

The legacy blue checks, which Twitter doled out to journalists, celebrities and other public officials for free to help curb impersonations and spam, were supposed to end April 1.

Musk took to Twitter on April 11 — days after the legacy checkmarks should have disappeared — to shift the end date to April 20 or 4/20. Yes, that’s the day when folks honor weed because Twitter is now owned by a middle schooler.

With the legacy checkmarks gone, Twitter will have verification marks only for paid users and businesses as well as government entities and officials. Now, if a user sees a blue checkmark and clicks on it, the label reads: “This account is verified because they are subscribed to Twitter Blue and verified their phone number.”

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Autotech Ventures’ new $230M mobility fund adds fintech, circular economy to its investment strategy

Autotech Ventures will use its newly closed $230 million fund to expand beyond its foundation of early-stage ground transportation startups and invest in what the firm believes are the next big opportunities in automotive and mobility.

Fintech, logistics, supply chain and the circular economy are at the top of the list.

The $230 million fund, its third since launching in 2017, will be used to invest in seed through Series C mobility-related startups, according to the company. A mixture of financial and corporate LPs, including Allison Transmission, American Axle, Iochpe-Maxion and Shell participated in the fund.

“We’re still a ground transportation-focused firm and we have a very similar strategy [with this fund],” Alexei Andreev, Autotech Ventures managing director told TechCrunch. “On a high-level, it’s same as Fund 1 and Fund 2. However, one of the fastest areas of growth is SaaS-enabled fintech. Auto commerce is inefficient and there are large pockets of profit to capture.”

The firm is particularly interested in transportation-related fintech ventures that are poised to grow during a recession.

“We made a prediction that sooner or later there will be a recession and we identified areas that benefit when the economy softens, Andreev said, noting that this latest fund invested in Yendo, a Dallas-based startup (formerly known as Otto) that lets customers borrow against their vehicles at the same interest rate as standard credit cards.

Autotech Ventures’ previous fintech investments include U.K.-based buy now, pay later startup Bumper and Carpay, a buy here, pay here loan servicing SaaS platform for car dealers.

Andreev said the firm is also investigating investment opportunities in the circular economy, a nascent industry focused on finding ways to reuse materials and products. Circular economy startups have garnered an increasing amount of attention and investment as automakers transition away from gas-powered vehicles and towards EVs.

Autotech Ventures is also cautiously wading into generative AI, although Andreev was quick to note that the company has not made any investments in that area.

Autotech has more than $500 million under management and has invested in more than 40 companies.

Some of the firm’s investments include computer vision startup DeepScale (which was acquired by Tesla), Lyft, used vehicle marketplace operator Frontier Car Group, Drover, Outdoorsy, Swvl, parking app SpotHero and Xnor.ai, which Apple acquired in January 2020. Five of those startups have gone public, including indie Semiconductor and Volta Charging.

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