Posted 12-15-2010 5:21 pm by
It is always a good idea to learn about how to avoid making mistakes when you are in the process of buying a new business.
The first step to take when embarking on such a venture is to know exactly what you are looking for. After all, just one mistake you make in the process could ruin it all.
Here are the most important mistakes to be aware of when buying a business:
Buying the wrong business for you. Whether you plan to be a hands-on owner or hire managers to do most of the dirty work, most business owners need a business that suits their best skills, interests, personality, and knowledge. If the business does not suit you as a person and a professional, you business will likely not be too successful.
Overextending yourself financially. A familiar mistake is not having enough capital to help fund your business in its beginning stages. As great as the business may seem at the time, you are far better off having a sufficient surplus of cash on hand for the unforeseen expenses that always seem to pop up.
Not setting up a corporation or an LLC. Avoid putting loan agreements, contracts, or the lease in your own name. You need to have or set up a corporation or LLC to buy the business, since you do not want to subject your personal assets to the risk of your business.
Not having a favorable purchase contract. Similar to buying a home, you have to negotiate details regarding the acquisition. From physical concerns regarding the property, to assets, intellectual property such as stock, outstanding bills, and trademarks, you will have to define in the contract the party who is responsible for each area and exactly when and how the responsibility shifts from the seller to the buyer. It would be smart to talk to an experienced corporate lawyer.
Not doing proper due diligence. Just because a business appears to be successful, and even shows a good profit, does not mean that it is without problems. You have to find out exactly what is borrowed, owned, leased, and owed. You do not want to get hit with a pile of unpaid vendors, rent due, bills, and other outstanding debts.
Failing to start without acquisition criteria. Criteria include business type, age, location, size, customer and product diversification, working hours and travel requirement, degree of competition, etc. A safe and profitable business acquisition pays the owner good salary/benefits, earns enough profit for the business to pay for itself, provides a good return on investment and sells for more than its purchase price.
Proceeding without a team. Buying a business is definitely a team effort. Your team provides you with important information and connections that you lack. Set up your support team before you start your search for a business to buy. Do not depend on the seller's or business broker's advisory team. A buyer who doesn't select the right team of advisors to promote a win-win deal will have one or more deal breakers. This means you can lose valuable opportunities.
Not knowing why the business is being sold. A business owner may say that he is retiring. He or she may know that a competitive superstore has purchased the property across the street. Find out why the business is up for sale and what the business environment will be like once you have taken over.
Don't die from buyer fever. Death from business buyer fever happens when a buyer wants a specific business so badly that common sense goes away. Even people who know what to do sometimes do the wrong thing, especially if they have a case of buyer fever.
Not knowing the value of the business. Buyers have to do a detailed financial analysis of the business to determine the right price to pay. This includes reviewing income and loss statements, key assets, balance sheets, cash flow statements, and contingent and actual liabilities.
Making major internal changes. The time it takes to train a new staff could end up costing you a ton of money and draining your savings. The current employees are the most familiar with the internal workings of the business.
Not promoting the business. It is a huge mistake to assume that since the business is already established that it will promote itself. Even if the business has a solid base of steady customers, you need to immediately establish a comprehensive advertising and marketing plan.
Ignoring the company image. Many businesses have established an image or a brand over the years. Customers are familiar with this and changing it too quickly can be self-damaging, since this image may be the most integral to the value of the business.
There you have it, some of the most important mistakes to avoid making while purchasing your new business. Always make sure to create a support team and talk to local buyer advisors to make sure you are getting the best deal possible. Buying a new business is so incredibly stressful but with these helpful tips, hopefully you can find the right business for you!
AARON MULLER| ADVANTAGE COMMERCIAL BROKERS
