Purchasing a small business can be an excellent way to start or grow your own company. It’s a fast way to obtain the assets and skilled staff you’ll need, as well as an established customer base with which to start. Buying a business can be a risky decision. Without the right knowledge beforehand, however, there are some common mistakes when buying a business that buyers should know.
Below are some commonly made mistakes by entrepreneurs when purchasing businesses, and ways that you can avoid them to buy businesses safely.
1. Not letting a business attorney review all of your contracts
There are many common mistakes when buying a business. One of the more important steps to purchasing a business involves due diligence. This is the process of investigating everything there is about a business from a legal and financial standpoint. Due diligence should ALWAYS be done before negotiating any purchase with a seller. This will help you understand your position on the sale and help with logistics over it.
This process may seem easier to handle yourself but hiring a CPA and lawyer to handle this process is advised. Due diligence will be able to help you better understand if a business has any debts or liens they may owe, lawsuits or litigations they may be involved in, information on suppliers and any debts owed to them, and give you a better understanding of the liability involved with the purchase.
2. Overestimating profit within the first 1-5 years
Never take profit or loss figures at face value. This is a pretty common mistake for new business owners to make. Unfortunately, we don’t live in a perfect world where we can trust a seller to be 100% honest about their business. However, as most sellers are trying to keep taxes to a minimum, this can result in higher-than-expected earnings. But, doing research into their sales profits, supply costs, labor costs, and any other asset costs they may incur will help you plan for profit made within the first five years.
Gathering this information can be a tedious task, however, making it a good idea for business buyers to hire an independent CPA. CPA’s are experienced in assessing a business and its assets, and converting that data into simple terms for a purchaser to understand. They can also help keep a business running smoothly with regular reviews.
3. Trying to please everyone instead of sticking with a target market
Sure, expanding a business sounds like a great idea. If done correctly, it can bring in a lot of profit. A business should never forget its target market, however, by trying to draw in newer customers. Your target market is where your business stays afloat. Expanding to get more customers should be done carefully.
4. Underestimating how much “start-up” costs will be; including hiring, training, and overhead costs
Buying a business is a lot easier than starting one from scratch. You have your customer base and employees already set up. The problem most new business owners face is underestimating start-up costs. While you may have an employee base to work from, you will need to consider hiring new employees and training both new and old ones. Overhead costs are another big consideration that gets neglected by new business owners.
5. Forgetting about business and liability insurance
Like car or homeowner’s insurance, businesses have liability insurance that can help protect you and the business as well. Once you’ve purchased the business, make sure that you are signing as the business and not yourself. This will prevent you from being personally liable for any contracts, as well as any accidents that happen on the business premises.
6. Not researching the demographic of your location
The demographic of your business’s location is key to how it functions within its market. Understanding the ages, genders, income levels, and so forth of the demographic area will help you plan ahead for how your business will reach your customers for its services.
7. Research where your supply is going to come from and how you’re going to provide services to customers
Supply and demand are two of the most-commonly heard words in business. Understanding demand is easy: everyone wants your product if you market it and it’s something useful. Supply, on the other hand, is the harder of the two variables. Always ensure that the suppliers you work with can handle the amount of product your customers demand. In some cases, it may be more convenient to rely on multiple supply chains for various services and products you provide.
8. Research WHY the business is for sale
Ask yourself these questions:
- Did it fail?
- Are the owners retiring?
- Did the demographic change?
- Is the business outdated?
An CPA can help find the answers to these questions, as well as any legal aid you hire for due diligence. While some businesses may be easier to manage and grow than others, some may not be worth the cost and effort it will take to turn them around.
9. Failing to create long-term goals; how will the business change/adapt to new technology, legislature, etc.
Most buyers are focused on how to grow the business. Long-term goals help a business productively plan how it can grow. Realistic goal-setting helps improve employee effectiveness and productivity.
Legislative changes, on the other hand, will require legal advice in most cases. Hiring a lawyer to help you understand changes to local or federal laws will help changes go over more smoothly for the business.
10. Making too many changes, too fast
Change is not something that everyone appreciates. Even small changes can cause employees to become upset. Try to take things slowly as you make changes to any business you purchase. Take your time to understand your new company and its employees. Explore how things work, who you can trust within the company, and how its politics function.
If you’ve considered purchasing a business, take your time to check with legal and business advisors, perform your due diligence, and work slowly with everyone involved. Make sure that any changes they experience are gradual to make the experience as smooth as possible. Most of all, be aware of these common mistakes when buying a business.