Say you’re thinking about growing by buying another company. People often call this a “bolt-on” acquisition, because you attach a new business to your existing one.
The idea can work brilliantly. However, plenty of deals that looked exciting at the time turned out to be expensive mistakes. Experienced buyers know this, so they watch for specific warning signs before they commit.
In this post, we’ll walk through five of the most important ones. We’ll also explain why they matter, how to test them, and what to do when you spot more than one.
Why Bolt-On Deals Go Wrong
A bolt-on acquisition promises a lot. You gain new customers, new skills or a stronger market position, and you gain them faster than you could build them yourself.
Unfortunately, the same speed that makes acquisitions attractive also makes them risky. Buyers often work against a deadline, and sellers present their best side. As a result, it’s easy to miss problems that only show up after the money has changed hands.
Excitement plays a big part too. Once you picture how the new business will fit into your plans, you start to see what you want to see. That’s exactly when careful checking matters most.
Warning Sign 1: Growth That Seems Too Fast
Fast growth looks impressive, and sellers know it. A business that doubled its revenue in two years can command a high price.
Even so, speed alone doesn’t prove strength. If a company grows much faster than its industry, you should ask what explains it. A genuine reason might be a new product, a major contract win or a smart move into a growing market.
Sometimes, however, nobody can offer a clear explanation. In that case, the growth may rest on shaky foundations. For example, the business might have offered heavy discounts to win customers, or recorded sales early to boost its figures. It might also have taken one-off work that won’t repeat.
How to test it
- Compare the target’s growth with the industry average, and ask for an explanation of any large gap.
- Break revenue down by customer, product and month, to see where the growth really came from.
- Check whether the growth continues in recent months, or whether it has already slowed.
Warning Sign 2: Big Client Names With No Signed Contracts
Sellers love to mention impressive clients. A well-known name adds credibility and suggests the business can win serious work.
The problem arises when those names appear in conversation but not in the paperwork. A client who bought something once, or who is merely “in talks”, isn’t the same as a client with a signed contract.
Without a contract, there’s no guarantee the relationship continues after the sale. Indeed, a client who dealt with the previous owner personally might simply walk away. Therefore, a buyer should treat unsupported name-dropping with real caution.
How to test it
- Ask to see the signed contracts for every major client, including their length, terms and renewal dates.
- Check whether contracts allow the client to cancel if ownership changes.
- Where possible, speak to key clients directly, with the seller’s agreement, to confirm the relationship is real.
Warning Sign 3: Profit Margins That Have Quietly Shrunk
Revenue tells you how much a business sells. Margins tell you how much it keeps. A business can grow its sales while its profit shrinks, and that combination often signals trouble.
Falling margins can have many causes. Costs may be rising faster than prices, or the business may be discounting to hold on to customers. Alternatively, competition may be squeezing it from several directions.
Sometimes there’s an innocent explanation. The trouble starts when the seller gives a vague answer, such as “it’s just a temporary blip”. A real explanation should be specific, and the figures should support it.
How to test it
- Review margins over at least three years, and look closely at the most recent months.
- Ask the seller to explain each significant change in specific terms.
- Compare the margins with those of similar businesses in the same industry.
Warning Sign 4: Customers Taking Longer and Longer to Pay
Profit on paper doesn’t pay the bills. A business needs cash in the bank, and slow-paying customers can quietly drain it.
When customers take longer to settle their invoices, several problems may lie underneath. They might be unhappy with the service, or they might be struggling financially themselves. Some may be disputing the invoices altogether.
What matters most is the attitude of the people running the business. If nobody seems concerned about the trend, that’s a worry in itself. It suggests they either haven’t noticed or don’t want to talk about it.
How to test it
- Ask for an aged debtors report, which shows how long each invoice has remained unpaid.
- Compare payment times over the last two or three years, and look for a steady drift upwards.
- Check how much the business has written off as bad debt, and whether that figure has grown.
Warning Sign 5: Figures That Have Been “Adjusted” or “Normalised”
Sellers often present “adjusted” or “normalised” profit figures. Done honestly, this makes sense. For instance, an owner might remove a one-off legal bill, or a personal expense that ran through the company, to show what the business really earns.
Nevertheless, adjustments deserve close attention. The warning sign is a pattern in which every adjustment makes the numbers look better, and none makes them look worse. Real businesses have unusual gains as well as unusual costs, so a perfectly one-sided list looks suspicious.
Because adjusted profit often feeds directly into the price, small changes here can cost you a great deal. Many buyers pay a multiple of earnings, so each pound of inflated profit may add several pounds to the price.
How to test it
- Ask for a full list of adjustments, with evidence behind each one.
- Challenge any “one-off” cost that appears every year.
- Look for adjustments that reduce costs without explaining how those costs will stay lower after the sale.
Spotting the Pattern
Any single warning sign might have an innocent explanation. A fast-growing business may simply be good at what it does, and a slow payer may be a temporary problem.
Two or three together, however, form a pattern worth taking seriously. For instance, rapid growth, shrinking margins and slow payments could point to a business that is buying revenue it can’t afford to keep. Similarly, unsupported client names and flattering adjustments might suggest a seller who is polishing the story.
The more signs you spot, the harder you should look. In some cases, the answers will reassure you. In others, they will convince you to renegotiate the price or walk away, and either outcome beats discovering the problem after completion.
What Else Experienced Buyers Check
These five signs form a strong starting point, but they aren’t the whole picture. Experienced buyers also look at:
- Customer concentration: a business that depends on one or two clients carries more risk.
- Key people: the departure of a few important staff members can damage the value.
- Legal and regulatory issues: unresolved disputes or compliance gaps can become your problem.
- Tax position: historic tax issues can pass to the new owner.
- Fit with your business: a good company can still be a poor match for yours.
Checking these areas takes time and skill. For that reason, many buyers bring in professional advisers early.
Why Professional Scrutiny Matters
Most owners know their own industry well. Even so, few have the time or training to examine another company’s accounts in depth. A good adviser knows where problems tend to hide, and they know which questions to ask.
Independence matters too. Because an adviser doesn’t share your excitement about the deal, they can look at the facts calmly. They can test the seller’s claims, check the numbers against the paperwork, and flag risks you might overlook.
Importantly, this scrutiny works best before you sign anything. After completion, your options narrow and fixing a problem costs far more. Before completion, the same discovery gives you leverage to negotiate, adjust the price or protect yourself in the contract.
Questions to Ask Before You Commit
Before you sign, try putting these questions to yourself and to the seller:
- Can the seller explain the growth in plain, specific terms? Does the evidence support the explanation?
- Do signed contracts back up every important client? Or do some rely on goodwill and good intentions?
- Why have the margins moved? Can the seller show proof, rather than offering a general reassurance?
- How quickly do customers pay, and is that changing? Does anyone in the business care?
- Do the adjustments look balanced? Have I checked the evidence for each one?
- Have I let excitement replace evidence? Where have I accepted a hopeful answer without testing it?
If you can’t answer these confidently, you probably need more information before going further.
The Bottom Line
Thinking of buying a business? Watch for unrealistic growth, name-dropped clients without contracts, shrinking margins, slow-paying customers, and conveniently “adjusted” numbers. The excitement of a deal is exactly when it’s easiest to miss them.
How H&Hendricks Can Help
Thinking about an acquisition of your own? H&Hendricks’ Business Support service includes exactly this kind of independent scrutiny of a target business, before you commit. A conversation early in the process can help you decide whether to proceed, renegotiate or walk away.
Ashley Bancroft is a founding Partner of H&Hendricks. A qualified Chartered Accountant and specialises in finance, strategy and entrepreneurship, with particular focus on value creation.
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