Common Mistakes When Buying a Business

Before taking a trip, you figure out where you're going and how you will get there.  You wouldn't jump in a plane without a pilot if you didn't know how to fly the plane yourself.  Buying a business is no different.  

If you are considering going out on your own, one of the best ways to do so is to consider buying an existing business.  This way, you get a proven cash-flow for your purchase.  Mind you, buying a business is a complex experience. It can be confronting due to business, legal, and people issues.  However, if you do your homework and align yourself with key support, buying a business can bring you the independence and success you desire.  The critical factor being that you buy the  right business, at the right price.  Be sure that you complete your due diligence your thoroughly.  Below are some common mistakes made when buying a business:

  1. Buying the wrong business. Be sure you take the time to identify your strengths.  We all tend to cheer on the underdog who overcomes their weaknesses.  That said, to maximize your potential, take the time before you buy, to identify your skills, expertise, interests and character.  This is true whether or not you plan on being owner and executive running the show, hiring a management team or keeping the former owner on as a consultant. If you spend the bulk of your time overcoming your weaknesses, it stands to reason that your business will suffer.
  2. Sell Sell Sell. Whether your business is for products or services, a mistake I’ve often witnessed is that new ownership assumes that an existing business will run itself.  What it is guaranteed to do is run itself into the ground!  Even with a solid customer base, which, let’s face, is part of the selling points for buying a business over starting a new one, make sure you take the time and plan and implement a marketing strategy.  
  3. Failing grade because you didn’t do your homework. Don’t be sold a horse that has a shine on it’s coat but can’t run.  Horse traders are nortorious for putting a sheen on a dull coat and selling the idea that a horse is healthy, fast and ready to win.  The same goes for a business.  Don’t take the financial statements and 30 minute tour of a business at face value.  Make sure to take a complete inventory of what is being sold, what is being kept by the seller.  Walk into the closing with complete and verified disclosure as to what’s owned, leased, and accounts payable and receivable.  After a closing is too late to discover stacks of bills due, pending litigation and customers with unpaid invoices.  
  4. Not finding out just how much is the business worth? Don't make an emotional purchase.  It’s common to rush in with near romantic notions of how you will run the business better than the seller had.  You are, essentially, buying yourself a job.  Whether you are responding to an ad in the paper, online, or an ad in a shop wind, it is ultimately your responsibility to do a complete financial analysis of the business to determine the appropriate price to pay. Again, if this is not your strength make sure you get an ally with the skills to help you parse through the last three years paperwork.  Keep in mind, there is no law mandating anyone pay the maximum amount due.  So, you will have to see how much the company actually makes.  
  5. Failing to ask “Why the break-up?”  Remember, the seller is in the business of selling his/her business. They may not be as upfront about disclosing the true reasons why the business is for sale.  Some factors in a seller’s reasoning to sell may be personal in nature, while others will impact your ability to achieve short- and/or long-term success.  For example, one Seller of a business claimed that he was selling due to health concerns, only for the Buyer to discover that the regulations were changing that would eliminate the market for the product the business made.  Know the lay of the land before you sign anything.  
  6. NEVER sign contracts, agreements, in your name as an individual. I can’t reiterate this point enough.  Prior to making a purchase, be sure to consider establishing a corporation or LLC that will buy the business.  This way your personal assets will not be subject to the risks of buying, let alone running the business.  , since you don't want to subject your personal assets to the risks of the business.
  7. Purchasing Goodwill that isn’t so good.  One of the benefits of buying an existing business the perception of the product/service.  This literally appears on the books of the business as an intangible asset comprised of the excess of the purchase price of a company over its book value.  Goodwill is established over time, sometimes years.  It can disappear quickly if you, as a new and enthusiastic owner, make too many changes too quickly, alienating your market in the process.  
  8. Under new management. We’ve all seen those signs posted.  It’s often because what a new business owner has purchased, they discover that the good will is poor or damaged due to past management.  It’s a way of letting the public know to come back and give the business a try because things have been changed.  However, consider the real message and cost.  What you’re telling your customer base is that your business was mediocre or bad (and you just paid hard-earned cash or went into debt for it.)  Furthermore, slow down before making immediate changes to the current staff who are most familiar with your product/service and existing client base and source of that alluring cash flow you just purchased.  Putting new staff in place may save you money by reduced salaries, in theory, but if it costs you efficiencies, customers or receivables, it’s not really saving, but costing you much needed money.  
  9. Saddling success with debt. One of the things the business didn’t have to do for the past-owner was pay down your purchase price.  Again, it’s easy to get caught up in the purchasing a business.  Don’t fall prey to your desire to get on with it, and fail to really examine your personal and business financial needs.  It’s best to make sure that you have sufficient moneys set aside to buy that business without taking on the burden of debt that can’t be serviced.  
  10. Negotiating an unfavourable purchase agreement. Anytime you make a purchase, it is you who determines the value of the item or service.  Having made sure that you know what your purchasing, taken the time to examine how much you can afford, don’t stop.  Take the time to negotiate the most advantageous terms.  Is it in your favour to purchase as an asset sale or stock sale?  Do you take the entire inventory, or reduce the the inventory by what’s aged, and thus reduce your offering price.  Apart from the tangible assets, be sure to consider trademarks, whether they are registered, unregistered, review contracts, stock, etc.  Be sure the deal you’re willing to sign contains the details.  You don’t want to find the devil in them too late.  
This is an area of both business and law that makes me an invaluable asset to your side of any negotiating table.  Be sure to set up an appointment for a free initial consultation.  

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