7 Business Buying Mistakes You Want To Avoid
Brad Ruth, CBI, CEPA
M&A Advisor & Business Consultant at GLBA Business Advisors brokered by eXp Commercial | Cleveland | Akron | Columbus
Buying a business is both an exciting and daunting prospect, no matter how many times you've done it. A key component to making a successful business acquisition is research, research, research.?
In today's world, there's no such thing as purchasing a business and hoping for the best. A lack of due diligence is one of the most detrimental business buying mistakes you can possibly make.?
If you're a first-time?business buyer, here are the most common mishaps you want to avoid before you sign on the proverbial dotted line.?
Business Buying Mistakes 101: Overestimating the Profit Margin
Naturally, when a business owner wants to entice a buyer they will do their best to highlight their company's profit margin. Sure, it's easy to become blinded by the numbers and wooed by the potential profitability of a new business venture.?
But what you want to keep in mind is that a business's profit margin is extremely variable. It's also a direct result of the management and effort that goes into running a business. If you run the business differently, it's most likely that you will, this may not offer the same profit potential.?
Even if you don't plan to change how the business runs, there are also market fluctuations to consider. Ultimately, it's on you to run the company according to these fluctuations -- and the previous owner's business management may not suit.?
This being said, you also don't want to be pessimistic. It's okay to view good profit margins with a positive outlook, but view it with a pinch of salt and remain cautiously optimistic.?
Assigning Yourself Personal Liability?
Another common business buying mistake you want to avoid is adding liability to your name. This happens when you sign business documents, such as a contract, on behalf of yourself, and not a business.?
Essentially, you are signing up for a huge amount of personal liability if anything happens to the business. Remember that it's not you who is personally buying a business. You want to create your own form of business -- whether it's an?LLC or incorporate, and use this business entity to sign important business documents.?
Avoiding the Reality of Why a Business Is for Sale?
When you first assess a business for sale, the first thing you want to ask is why it's for sale in the first place. This is a huge part of the transparency of buying a business from someone else.?
Understanding these types of details can help you during negotiations. But most importantly, it can save you from buying into a business that just doesn't live up to its status, or the business owner's intentions.?
A simple example is this: the current business owner is in financial trouble. They have declared personal bankruptcy and they need the money from the business sale. This puts you in a good position to negotiate on price.?
On the other hand, if the business owner wants to establish a competing business close by, you need to know about this too. This way, you can sign a non-compete agreement to protect the business you're buying.?
Some business owners might be reluctant to offer up exact or even truthful details about why they're selling. This is why it's important to spend time with the business owner in casual conversation which may hint at clues for the real reason!?
领英推荐
Otherwise, you could always do a background search on the business, the business owner, and with the?Better Business Bureau.
Neglecting Your Due Diligence
As we mentioned earlier, due diligence is everything when buying a new business. This is the process of researching and investigating everything there is to know about a business before you buy it. You want to do a decent amount of due diligence before you enter negotiations so that you have some information and?leverage to work with.?
Make sure you do some research on the following:?
Aside from this, you also want to take a deep dive into the financials of the business. While profit margins are just a guide, do your research on the performance of the business over the past 5-10 years.?
Overlooking Crucial Details in?Your Purchase Contract
A large part of buying a business is the negotiation process. It's important to spend a good chunk of time negotiating all the finer details regarding your acquisition -- don't leave stones unturned.?
At the end of the day, you want to ensure that the purchase contract is as favorable to you as possible. Make sure to cover?crucial?aspects such as:
Define who is responsible for all of these aspects in the purchase contract when business ownership shifts. You might want to hire the expertise of a corporate lawyer for assistance.?
Being Over-Zealous When Making Changes?
It's important to remember that most people are apprehensive about change -- whether it's in their personal or work lives. The last thing you want to do is ''rock the boat'' too much when you first buy a business. Don't be too quick to make major changes. By doing so, you could scare off valuable employees and customers, too.?
You want to take your time and get to know the business for a little while before you implement changes. And even then, remember to start off small. Get a feel for how the business works and any business politics you may need to overcome.?
Forgoing the Help and Advice of Others?
Even if you're an experienced business owner, all businesses are different and run in their own ways. Don't make the assumption that you know exactly what a business needs and turn away advice or help when it's offered to you.?
Instead, you want to embrace the information and advice that fellow managers and employees offer. This type of help allows you to think critically about every business decision you make. Seek out the expertise of?a business broker, tax professional, or corporate lawyer when needs be. It could make all the difference to your future success!