The Mistakes You Must Avoid When Buying a Business

A person sits at a desk with an open portfolio wondering about the mistakes he might make when buying a business

From overlooking key issues to making missteps in negotiations, most first-time business buyers make mistakes when buying a business. In this article, you’ll learn about some of the most common mistakes buyers make, and you’ll receive actionable advice that you can use to navigate around the pitfalls.

1

Entering the process without a clear objective

Often, prospective buyers begin their search because they’ve heard of others’ successes in buying an established business. While the advantages to this approach can be great, it’s important that you take the time to assess whether acquisition is a choice that aligns with your goals and your ability to invest the time and resources that are required to succeed.

 

Our guide, Pre-acquisition Action Items: The Critical Steps You Must Take Before Starting Your Search, can help you firm your objectives.

2

Underestimating the work that goes into buying a business

Many buyers find that it takes up to 12 months to source the right business. Some search for two years or more. If you’re determined to buy a business, you should recognize that the process can be long and complicated. Plan to spend months reviewing business listings, signing non-disclosure agreements, and reviewing the financials and practices of multiple businesses before settling on a target and completing your acquisition.

 

Our articles, Due Diligence for Buying a Business and A Step-by-Step Guide to Evaluate a Business Listing, can help you set yourself up for success.

3

Forgetting to think like a seller

Buyers can fair far better in negotiations by considering a seller’s needs and goals alongside their own. Put this concept to work in your negotiations by considering a seller’s attachment to his or her business and avoiding harsh criticisms and shows of disrespect when discussing the business’s drawbacks.

 

You should also try to connect with the seller and build a positive working relationship that’ll serve you both well as you discuss confidential matters and negotiate terms. By establishing a good working dialogue, you may access better information, and you’ll be able to discuss the business’s blind spots and attempts to work around them.

 

Read our guide, How to Negotiate to Buy a Business, to learn more about this part of the acquisition process.

4

Accepting the success of a business at face value

It’s a broker’s job to present a seller’s business in the best possible light. In some cases, they may make adjustments to the earnings and include add-backs to improve the financial picture of the business. Alternatively, they may coach the seller through some pre-sale moves, such as selling off excess inventory or temporarily slashing prices, to boost the attractiveness of their business. By working with an accountant, you’ll be able to spot these moves and discover irregular financial behaviors that may signal trouble in a seemingly good business.

 

Learn how to find a great accountant in our article, The Right Accountant for Your Acquisition.

5

Failing to assess the seller’s base of customers

Many small business owners cultivate sales among their personal base of contacts. You should be concerned if a business’s sales are dependent on the relationships that existed between the seller and the business’s customers, and further, that the customer base may disappear when the owner exits the business.

 

Avoid this mistake by asking sellers to disclose the percentage of customers who have personal connections with them. Then, you should assess whether the customers who remain represent a large enough percentage of the business’s sales history to proceed with the transaction.

 

Our article on due diligence can help you spot other red flags.

6

Trusting the accuracy of the seller’s data

In every transaction, a seller will present balance sheets, income statements, and other financial documents that demonstrate a business’s strength and hint at its future viability. However, these documents should never be accepted at face value. It is imperative that you study and verify the business’ financials. Hire a certified public accountant (CPA) to assist in the assessment and ensure that there are no red flags, questionable line items, or evident problems in the business’s cash flow or performance.

7

Relying on numbers alone

Sometimes, buyers complete their evaluations of a business without considering external factors, such as customer reviews, employee satisfaction, competitive positioning, environmental concerns, legal claims, and regulatory issues that can impact a business’s long-term success and sustainability. You should remember to conduct outside research, perhaps with the help of an attorney, to obtain a comprehensive view of the business before proceeding with your acquisition.

 

Learn about why you should have an attorney on your team in our article, The Right Attorney for Your Acquisition.

8

Missing the mark in valuations

Buyers tend to overestimate the value of businesses because they miscalculate the magnitude and frequency of future capital expenses. To avoid this mistake, you should account for both working capital needs and the costs that’ll be required to boost infrastructure, upgrade technologies, and maintain equipment. An accountant can help you with these projections.

 

Learn more about valuations in our article, A Practical Guide to Evaluate the Asking Price of a Business.

9

Forgetting to set aside money for working capital

Some buyers raise funds for acquisition without setting aside money to cover operational concerns and emerging needs. When this occurs, buyers create a scenario that may require them to take on more debt or put off improvements that are necessary for the success of their business.

 

Avoid this mistake by establishing a contingency fund that equals approximately 10 percent of the purchase price of your business, as well as a working capital account that can cover at least three months of expenses.

 

Interested in ideas for raising capital? Read our article, Your Go-to Guide for Financing an Acquisition.

Many of these mistakes can be avoided by connecting with legal and accounting experts who are familiar with the small business acquisition process. If you’re ready to connect with one of these professionals, click the buttons below to get started:

 

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