Buying a business can be complex and challenging. There are many issues to consider from business and finance to legal and people. However, if you do your homework and thoroughly research the business you can avoid some common mistakes.
1) Buying a business that doesn’t fit.
Purchasing a business is a big decision. It starts with choosing the right business for you. There are several things you should first consider to help determine what business may be a good fit for you. A potential business should fit your skills, knowledge, interests, and lifestyle. The right business will allow you freedom, flexibility, and a sense of accomplishment. On the other hand, a poorly fit business could mean years of frustration, heartache, and debt.
2) Signing contracts or agreements in your personal name.
One of the biggest mistakes potential buyers make is signing their own name on documents related to the business. You should avoid doing this because it means you personally assume liability for the company. A wise practice is to set up a corporation or LLC to buy the business. This will protect your personal assets should any legal ramifications happen in the company.
3) Neglecting proper due diligence.
Due diligence is the process of investigating a business top to bottom. There are many documents, agreements and statements you will want to obtain and analyze. So, a lawyer and accountant can be very helpful in this process. You don’t want any surprises before or after you buy the business. Here is a checklist of things to go through.
4) Not knowing why the business is for sale.
There are many reasons why a business owner may be selling their company. Typically there is an upfront reason as well as an underlying one. Perhaps the owner is on the brink of bankruptcy and needs the cash. Knowing this scenario puts you in a better position to negotiate. On the other hand, maybe a business owner is ready to retire or close shop. Spending time with the business owner will provide valuable insights. By really listening, you can understand the owner’s motivation to sell, learn about the business’ operations, identify concerns of the seller and potential blind spots.
5) Overextending yourself financially.
When buying a business, you should avoid going into large amounts of debt. So, it is better to either wait till you have enough funds or find other individuals who are willing to invest.
6) Initiating drastic change from the get-go.
Changing ownership in a new company brings challenges. Change itself can be difficult for some individuals. If done too fast you may lose valuable employees and customers. Seasoned entrepreneurs take time to feel out the place, observe, and gain an understanding of company dynamics. Give employees time to adjust. Seek insights and opinions from individuals internally to grow the business.
7) Not understanding the value of the business.
Lastly, one of the most important steps of buying a potential business is knowing the value. Doing a detailed financial analysis of the business will help determine an appropriate price to pay. Having the help of a valuation expert can make this process very simple. Valuation analysts review income and loss statements, balance sheets, key assets, cash flow statements, and assess the value of goodwill. Want to know more about the valuation process read this article and review our business valuation page for more information.
When looking to buy a company, be patient. Often finding the right business takes time and impatience can lead to bias and poor decision making. By following these tips, you can avoid some of the common mistakes when buying a business.
Peak Business Valuation would love to help you with buying a business. We have contacts with several brokers across the country and provide business valuations and appraisals to help in the purchase negotiation. Questions are always welcome. Please reach out via email or phone call.