10 Mistakes When Buying A Small Business

Buying a business is exciting but fraught with risk if you don’t know what you’re doing. To avoid problems, check out the most common mistakes listed below. That way, when you’re ready to buy a business, you’re more likely to enjoy years of success.

Not Doing Due Diligence

Not all is as it appears on the surface, and that is never truer than when buying a company. The current owner can wow you with financial statements to show you that business is booming. However, you must perform due diligence to ensure what is shown to you is accurate.

Ensure you know what the company owns, its leases, how much debt it has, and what others owe it.

The last thing you want is to purchase a business and discover a drawerful of bills you must pay. And then the income you were counting on doesn’t happen. But if you do excellent due diligence, you’ll avoid this critical error.

Not Enough Cash On Hand

Successfully running a company requires money. A successful business produces enough revenue to cover its expenses every month. When income drops, then you must have cash on hand to cover your costs.

If all your available capital is spent buying the company, you can’t handle shortages when they happen. Many companies ran into this problem during the pandemic.

Remember: Don’t purchase a company until you have the cash available to buy it AND the capital needed to keep it going if revenue drops.

Not Knowing Why The Business Is For Sale

Knowing why the business is being sold can be used as leverage during negotiations. Also, it can avoid you making a mistake about the status of the company and the intentions of the owner after it sells.

For instance, if the owner is in bankruptcy and needs money from the business, you have an edge in price negotiations. If the owner wants to set up a company to compete against you, it’s wise to demand a non-compete agreement with the current owner.

However, it can be tricky to understand why the owner is selling. There usually are two reasons: the reason they tell you and the reason they tell themselves.

To learn what the unstated reason is, try to spend some time with the current owner in casual conversations. Listen for small details that may give you insights about what’s driving them to sell.

And there’s nothing out of bounds about checking the business owner’s credit rating and Better Business Bureau rating.

Assuming Nothing Will Change

A significant error that a buyer makes is looking at the business for sale and thinking it will be the same when buying it. Once you purchase it, the valuation changes. As the new owner, you’ll do things differently. You’ll have different relationships with your workers, vendors, and customers.

You may have a better or worse business, but you don’t know for sure what will happen. When you buy it, be prepared for things to change.

Not Grasping Goodwill

Who buys from the company, and are they loyal? This is the goodwill the business has. Goodwill is hard to quantify, and it’s usually thought of as the value of the current customers. If you don’t understand the level of goodwill the existing customer base has, it’s hard to gauge the business’s actual value.

Trying To Do It All On Your Own

You might not want to pay for a business broker, but you should be ready to pay a CPA to help with the tax and financial situations. You’ll also need an experienced attorney to review and write the contracts. Buying a business is not a do-it-yourself operation.

Assuming Your Cash Flow Will Pay For Debt

There always is a period of transition when you acquire a company. Some vendors are loyal to the previous owner and stop working with the company when you come on board. Also, you could lose some customers as you make the transition. These things almost always happen when a company changes owners, so expect them.

Your cash flow could drop temporarily when you buy the company, and if you assume revenues will cover your debt, you could be courting disaster.

Paying For The Business’s Potential

The business owner may try to establish a high price for the business based on its potential. For instance, a self-storage company that is 50% occupied when you buy it could be worth $500,000. But if it’s 75% occupied, its value could be $750,000. Don’t make the mistake of paying $750,000 for the company because the owner sucks you in on the income potential.

Remember that it will be your effort, energy, and time that creates future value. Award yourself for your efforts. Don’t pay too much for the company, thereby paying the seller for your work. Your purchase price should reflect the business’s condition the day you buy it.

Changing Things Too Fast

Even if you have big ideas for boosting profits and productivity, easy does it. If you go too fast, you could alienate employees you need, and customers may think it’s not the same business anymore.

Manage your new business by walking around and getting the feel of the company. Understand your workers, customers, and the social aspects of the place. Figure out the people you can trust and what the politics are. If you plan to make changes, fine, but find reliable employees who can help you introduce those changes to the other workers. Take things slowly, and you will be able to make the changes you want.

Buying In Your Name

Perhaps the worst mistake you can make is to acquire a business in your name. It happens all the time: First-time business owners are excited and sign contracts in their personal name. This is a massive blunder because you’re on the hook for any business losses.

If you cannot pay your debts, your creditors could seize your home, vehicles, and life savings. It’s critical to use the proper business structure, such as an LLC, to reduce your risk.

Hire an accountant and attorney to determine the ideal business structure for your company. Don’t put everything in your name, or you could risk all you have.

Owning your own company can be the best path to financial success. But you may find that goal elusive if you make any of the mistakes above.

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