Buying a Business – 7 Mistakes to Avoid

Buying an established business is generally a wise business decision. Businesses with a proven track record of success present a low and manageable risk for the buyer and a high potential to make decent profits right after the purchase. Nevertheless, many business buyers make huge mistakes that cost them a lot of money and sometimes cause them to fail. These are some common mistakes that buyers can avoid with some planning:

  1. Starting the search for a business to purchase prior to arranging proper financing. Buying a business is extremely time and money consuming. Spending your resources and been unable to buy because of insufficient finances is unfair to you and to sellers. Some might argue that this is a great learning experience worth doing anyway. That cannot be further from the truth. If you are enable to purchase, then save yourself the hassle of trying to buy. Recent statistics have shown that only 10% of buyers end up buying a business in their lives. The remaining 90% never buy.
  2. Looking for the absolute best”perfect” deal. This is very frequent and buyers in most cases end up with no deal at all. Potential business buyers must understand that there is no perfect deal. The best possible deal is the deal that can make you money after the purchase, and a business that you enjoy and that makes you happy. Paying a little bit more than you should is almost irrelevant. I have seen buyers overpaying who were very successful after the purchase and I have seen buyers who got a real bargain just to fail miserably after the purchase. Furthermore, if sellers end up with a price they are not happy with, chances are that they will not happily transfer to you all the businesses knowledge so necessary to take over the business. This could have dire consequences on your success.
  3. Taking too much time to purchase the business. I have seen buyers spending years and still been unable to make a decision about buying. This can be devastating morally and financially. I advise against trading your valuable time for little money. Years wasted looking for a business that doesn’t exist are worth a lot of money. Keeping delaying the decision to buy just for the purpose of saving some money on the purchase price is not the way to go.
  4. Hesitating and been vulnerable to the buyer’s remorse. Business buyers should be prepared for buyer’s remorse. It’s normal and happens all the time. When you sign an agreement to purchase a business, it’s not a good idea to discuss your deal with every potential friend, acquaintance of family member. If you do, don’t expect people to encourage you in your decision. Human nature is conservative. We fear the unknown and most of us are not entrepreneur. So most people you will talk to will scare you and probably talk you out of the deal.
  5. Been too suspicious in screening business opportunities and not suspicious enough during due diligence. Paradoxically, business buyers are extremely suspicious when talking to business sellers for the first time but as soon as they establish a personal relationship with sellers they stop investigating the business and refuse to see any red flag about the business. This is very wrong. A buyer should be open minded when inquiring about a business for the first time and should not jump to conclusions about the honesty of the seller or the viability of the business. This excess of premature suspicion can only cause you to miss some good opportunities and doesn’t add any value because it is not fact based. However due diligence is very important when a conditional deal has already been signed in order to protect you from some unscrupulous sellers.
  6. Not respecting the Non-Disclosure Agreement signed with the sellers or their brokers. Some buyers become so excited by a business they have visited that they start talking to friends and relatives about it despite having signed a non disclosure agreement. The word goes out that the business is for sale and the upset seller stops any contact with the buyer. In the best case the seller will forget about the buyer otherwise the buyer might have to deal with a law suite for breach of non disclose agreement.
  7. Using inexperienced advisers. while the use of knowledgeable advisers such as lawyers and accountants can add a lot of value to the deal, sometimes an incompetent adviser can beak a very good deal. It is very important that any adviser used be very experienced in the business purchase and sale. Frequently, an adviser lacking experience in deal making will focus so much on protecting his/her client and becomes so demanding that the other side gets upset and decides to walk away from the deal. A good deal negotiator tries to reach a win-win situation when negotiating a deal or advising the negotiating parties. Business buyers should choose advisers who have a successful track record in similar business deals.

These are some of the most frequent mistakes that we see repeated again and again with devastating consequences on business buyers.  If you are looking to purchase a business in the near future, please take some time to learn about the business purchase process so you can avoid costly mistakes.

Good Luck!