The 5 Biggest Mistakes Entrepreneurs Make When Buying Businesses
If you want to be a business owner, you have two options: start your own business or buy a business. In many cases, the latter option makes more sense. But if you’re going down this route, be prepared for all that it entails.
5 Mistakes to Avoid
Thousands of businesses are bought and sold on an annual basis. Only a few of these transactions end up being mutually beneficial to both buyer and seller. If you want to be involved in a business transaction that’s both lucrative and fair, you’ll need to do your due diligence.
In particular, we advise avoiding the following costly mistakes that so often ruin business purchases:
1. Failing to Perform Adequate Research
According to the business brokers at VRBBCharlotte.com, the average buyer doesn’t do nearly enough research when purchasing a business. They take information at surface level and don’t bother to dig deep into the intricate details and financials that tell the full story.
The process of buying a business typically takes somewhere between six months and two years to unfold. You aren’t going to find a business the first day you start looking. (If you do, this is probably a sign that you have low standards.) Keep this timeline in mind and be prepared to spend months finding possible businesses, and then a few more weeks researching the ones you’re interested in. There’s no rush!
2. Not Understanding the Motivations of the Seller
When buying a business, it’s helpful to know why the current owner is selling. In other words, what is his motivation for exiting? This will tell you a lot about the company’s potential.
There’s a big difference between a business owner who is 65 and wants to sell the business to fund his retirement, and a young business owner who is supposedly making good money and suddenly makes a decision to jump ship. In the latter case, the business owner may know something that you don’t. (Perhaps a new competitor is about to open up a store in town? Maybe the company is quietly bleeding money?) This is something worth exploring in further detail.
3. Not Drafting a Thorough Contract
If it’s not written down, it doesn’t exist. This should be your mantra when buying a business. Take the time to ensure you have a favorable and detailed purchase contract.
“From physical concerns regarding the property, to assets, intellectual property such as trademarks, stock, and outstanding bills, you need to define in the contract who is responsible in each area and exactly when and how the responsibility shifts from the seller to you as the buyer,” AllBusiness.com explains. “It would be wise to consult an experienced corporate lawyer.”
4. Buying the Wrong Type of Business
What type of business fits your personality, lifestyle, and interests? There’s a huge difference between selling physical products online, running a brick and mortar retail store, and running a consulting operation. Purchasing the wrong type of business will limit your potential from the very start.
5. Making Too Many Assumptions
You know what they say: If you make too many assumptions, you’ll eventually make an ass out of yourself. Well, in the case of buying a business, you’ll also make yourself broke.
Never assume anything when purchasing a business. No matter what the current business owner tells you, don’t assume that you can run this business part-time and continue to generate profits. Don’t assume that current customers will stick with the business through the sale. Don’t assume that you’ll be able to double profitability in six months.
This isn’t to say you can’t dream or have high expectations, but there’s a difference between striving for something and assuming that it’ll play out exactly the way you want it to. The latter is foolish.
Buy With Confidence
When you’ve done your research and are aware of the common pitfalls that hold entrepreneurs back, you’ll find that you’re free to buy a business with complete confidence and high expectations. This is the frame of mind that you want when going into the process. It bodes well for sharp, proactive decision making.
If aren’t to the point where you feel confident enough to put in an offer on a business, patiently return to the drawing board and wait until you have sufficient information to make an educated investment. This sort of discipline and patience will yield dividends in the years to come.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.