Buying A Business
4 Signs a Company is in Financial Trouble
Some buyers can swoop in and bring a business back to its glory days or even better. However, if this is something you’re interested in doing, it is very important to consider all the financial and structural aspects of a company to ensure you don’t acquire a total lost cause. Continue reading to learn about the signs a company is in financial trouble.
What Determines Financial Distress
Typically financial distress begins to take hold of a company when its income no longer meets its financial commitments. Usually, a company’s financial trouble is accompanied by high fixed costs, illiquid assets, or revenues impacted by economic downfalls — not to mention damage to its reputation and creditworthiness.
Warning Signs of a Company in Financial Trouble
Evaluating a company’s financial situation requires you to look at past, present, and projected data. While these signs are not always a definite red flag, they should be heavily considered so you have a better idea of what you will take on if you go through with the purchase.
1. Cash Flow Problems
Insufficient cash flow results from a company spending more than it takes in. Liquid cash can run tight for understandable reasons, like seasonal fluctuations or recent restructuring, which aren’t a significant concern. However, you’ll want to be alert to gaps and low earnings patterns and what they stem from.
Some causes of concern may be:
- High overhead costs
- Heavy debt loads and high-interest payments
- Poor spending decisions
- Outstanding accounts receivable
A cash flow statement is one of the most telling financial documents in evaluating a company’s financial health, so make sure you take the time to review it thoroughly. And, don’t hesitate to reach out for help if you have questions about what you’re looking at.
2. Low Profit Margin
It’s said that low margins are usually the first sign of difficult times. Low margins indicate that costs are too high or sales prices too low, which aren’t sustainable in the long-term, especially when you consider that this means lower net profits and wages for employees. Sometimes, decreasing sales costs can be a strategic move by a new business owner to sell more units. Others may be able to streamline operations or cut manufacturing costs. In any case, it’s worth evaluating if and how likely it is for you to increase revenue.
3. Weak Sales Growth
Instead of solely measuring how a company is growing, you should also look at its capacity to grow. Perhaps the current owner doesn’t have the time or resources to invest, or they may not be capitalizing on the right opportunities. But, if the company’s ability to grow seems lacking — be that in sales or internal — there is a good chance that it is not doing well.
Sales growth is one of the biggest indicators of how the market responds to products or services. If, through diligent work to try and increase it, there’s a probability that the business would not grow, you may want to consider its viability in the market and whether it has enough customer backing to support it.
4. High Turnover
While a high employee turnover rate is not always an indicator of a distressed company, if you see it has become a trend, coupled with any previous signs of financial distress, it might suggest something is awry within the company. It can also be pretty telling if high-ranking executives are coming in and out at an unusual pace. Usually, this indicates concerning amounts of uncertainty among board members about the company’s viability.
No matter what you are looking for when buying a business, it is of the utmost importance to understand its financial position and consider whether it will affect the next steps of your purchase or if you even move forward with the process.
When you work with a Sunbelt Business Broker, they can help you determine if a company is in financial trouble, break down their valuation, and make sure you’re on the right track. Working with Sunbelt is a great way to ensure you understand all aspects of the buy and aren’t left with any outstanding liabilities. Contact your local Sunbelt office today for a consultation to learn more about how we can guide you through the process.