Red flags: 15 warning signs before buying
Introduction
Every year in Switzerland, hundreds of SME acquisitions end in disappointment. Not because the idea was bad, but because warning signs were ignored or misinterpreted.
A red flag is not necessarily a deal-breaker. It is a signal that deserves attention and thorough investigation. Some can be overcome with the right resources. Others should make you walk away immediately.
The difficulty? Distinguishing a minor problem from a major risk. Knowing when to dig deeper and when to move on. Buying a business requires rigour, but also discernment.
This guide identifies 15 critical red flags classified by category: financial, operational, human and legal. For each, you will find the key questions to ask and the concrete actions to take. The goal is not to make you give up, but to equip you to make an informed decision.
Use this evaluation grid as a diagnostic tool. An isolated red flag may be manageable. Multiple combined red flags should seriously alert you.
📌 Summary (TL;DR)
Fifteen red flags classified into four categories help you identify risks before buying a business. Financial signals (declining turnover, client dependence) and operational ones (staff turnover, obsolete systems) reveal structural weaknesses. Human and legal red flags expose hidden risks often overlooked.
Faced with a red flag, three options: investigate thoroughly, negotiate the price downwards, or walk away if the risk is too high. The final detection grid allows you to quickly assess the overall severity of your file.
📚 Table of contents
Financial red flags: critical warning signs
(1) Refusal to provide detailed accounts or incomplete documents. A transparent seller must be able to present their balance sheets, income statements and cash flow statements for a minimum of 3 years. If documents are incomplete, delayed or "being finalised", this is a major warning sign.
Questions to ask: Why is this data not available? Who manages the accounting? Are the accounts certified?
(2) Unexplained decline in turnover over 2-3 years. A downward trend without a clear reason (sector context, departure of a major client) may indicate structural problems or a loss of competitiveness.
(3) Old and significant customer receivables (>90 days). Accumulating unpaid invoices signal collection difficulties or clients in difficulty. This directly affects cash flow.
(4) Hidden debts or undeclared liabilities. Personal loans from the seller to the business, unmentioned guarantees, tax or social security arrears: these elements can explode after the takeover.
(5) Excessive dependence on a single client (>40% of turnover). If this client leaves, the business collapses. Check the diversification of the client portfolio.
For rigorous financial analysis, use the Leez valuation tool and consult our rapid evaluation grid.
Operational red flags: when the business shows structural weaknesses
(6) Recent or planned departures of key employees. If the sales director, workshop manager or technical manager leave the business, you inherit an operational void. Identify critical talent and their intention to stay.
Questions to ask: Who are the indispensable people? Have they been informed of the sale? What are their conditions for staying?
(7) Undocumented processes and dependence on the seller's knowledge. If everything relies on the current owner's memory, the transition will be complex and risky. Procedures must be formalised.
(8) Obsolete equipment or deferred investments. Ageing machinery, premises requiring renovation or outdated IT systems represent significant hidden costs post-acquisition.
(9) Ongoing disputes (clients, suppliers, employees). Legal proceedings, claims or labour conflicts can lead to unforeseen costs and damage reputation.
(10) Precarious contracts or contracts nearing expiry. Commercial lease expiring in 6 months, unrenewed supplier contracts, temporary client agreements: all continuity risks to assess.
These purchase warning signs require thorough investigation before any decision.
Relational and human red flags: beyond the numbers
(11) Seller evasive, imprecise or defensive during exchanges. If the owner avoids your questions, changes the subject or becomes defensive in response to your legitimate requests, be wary. Transparency is the foundation of a successful takeover.
Concrete example: You ask for details of operating expenses and are told "it's average for the sector" without precise figures.
(12) Excessive pressure to conclude quickly without due diligence. "I have other interested buyers", "We need to sign this week": these tactics aim to prevent you from properly analysing the file. A serious takeover takes time.
(13) Negative reputation (online, sector, suppliers). Check Google reviews, professional forums, discreetly question suppliers or clients. A bad reputation is difficult to repair.
Practical advice: Trust your intuition. If something seems strange, dig deeper. Takeover dangers are often detectable through careful listening and external verification.
These takeover red flags can be as revealing as financial data.
Legal and regulatory red flags: hidden risks
(14) Regulatory non-compliance (licences, authorisations, sector standards). A business operating without required authorisations, not complying with environmental or safety standards, or whose licences have expired exposes you to sanctions and compliance costs.
Examples: Restaurant without up-to-date operating authorisation, construction company without required certifications, online business not compliant with Swiss GDPR (LPD).
Questions to ask: Are all licences valid? Have there been recent inspections? Any formal notices?
(15) Complex or opaque legal structure (multiple holdings, dispersed assets). If the business is entangled in several companies, with assets distributed across different entities, or if the structure is unclear, legal and tax risks increase considerably.
Faced with these business purchase pitfalls, it is essential to call on legal experts. The Leez partner network (lawyers, fiduciaries) can support you in the legal audit and securing your acquisition.
How to react to a red flag?
Not all red flags are deal-breakers. Some can be negotiated or corrected, others are absolute deal-breakers. Here is a structured approach in 4 steps:
1. Document and verify. Note each warning sign, collect evidence, cross-reference sources. Do not rely solely on the seller's statements.
2. Ask direct questions to the seller. Confront them with inconsistencies or grey areas. Their reaction (transparency or defensiveness) will tell you a lot.
3. Call on experts if necessary. Financial auditor, lawyer, sector expert: investing in professional due diligence can help you avoid costly mistakes.
4. Adjust the price or conditions, or withdraw. If the red flag is serious but manageable, renegotiate the price downwards or request contractual guarantees. If the risks are too high, have the courage to walk away.
Reality on the ground: Some red flags (major hidden debts, proven fraud, serious non-compliance) should make you abandon the operation.
To understand the overall acquisition process, consult our guide on the 8 steps to a successful takeover.
Rapid detection grid: assess your red flags
Use this checklist to quickly assess the severity of warning signs detected during your analysis:
🔴 Critical (potential deal-breaker): Refusal to provide accounts, hidden debts, proven fraud, serious regulatory non-compliance, major ongoing disputes.
🟠 Serious (requires thorough investigation): Unexplained decline in turnover, departures of key employees, client dependence >40%, obsolete equipment, negative reputation, pressure to conclude quickly.
🟡 Minor (to monitor and negotiate): Moderate receivables >90 days, poorly documented processes, contracts nearing expiry, complex but transparent legal structure.
Action rule: If you identify 2 or more critical red flags, or 5 or more serious signals, seriously reconsider the opportunity. It is better to avoid a bad takeover than to manage insurmountable problems after the acquisition.
Explore other opportunities on the Leez platform and consult our guide to avoid pitfalls when buying a business.
Identifying red flags before acquiring a business is not an exercise in excessive mistrust, but a strategic prudence approach. Financial, operational, human and legal warning signs often reveal structural problems that can compromise the viability of your takeover project.
An isolated red flag is not necessarily a deal-breaker. The essential thing is to ask the right questions, demand documented answers and seek appropriate expertise when the situation requires it. Rigorous analysis upfront helps you avoid costly surprises after the transaction.
Are you looking for a takeover opportunity in Switzerland? Browse the businesses for sale on Leez and use our rapid evaluation grid to quickly identify high-potential files. For in-depth analysis, our network of experts can support you in due diligence.
