At last, you’ve found an existing business that’s perfect for you, but don’t forget caveat emptor (buyer beware). You’ve made the decision to buy an existing business. You have experience in your field. You have funds available. You’re too young to retire. Your funds aren’t sufficient on which to retire. You want to work but don’t want to start a business from scratch. And now you’ve found a business that seems to fit the bill. It sounds like purchasing a business already in existence is the perfect solution, and in many cases, it is. But there are risks involved, and after 30+ years of experience, we have found the following to be the five most common mistakes that buyers make.
1) Money, money, money
Buying a business with insufficient funds can be disastrous, and sadly this happens time and time again. Buyers know exactly the funds needed for the purchase, and ensure that is available, but they so often underestimate the funds required for the first few weeks, or months, of the business under their ownership. They work out cashflow with one eye on the positive projections the seller has provided, but then find that reality is different, and they struggle to pay salaries and suppliers. Having invested your hard-earned cash into buying the business, there is nothing worse than being unable to keep the business going (read more about why a business may be failing).
2) Fools rush in
When the business you’re looking at seems to be the perfect fit, you are obviously keen to proceed and complete the deal. Of course, due diligence is required, and not surprisingly, you are probably hoping that the results of the checks will be positive.
Sometimes, when that’s not the case, you still try to put a positive spin on it, rather than face a harsh truth and maybe even see your dream drift away. Sometimes, you rush due diligence, perhaps subconsciously trying to minimise the chance of negative reports, rather than accept that the business is not for you. Worst of all, your eagerness may prevent you from asking the really difficult questions, when asking the right questions is often the key to making the right purchase.
3) With a little help from your friends
In most cases, you will be looking to buy a business in a field where you have experience and expertise. You realise you may need accountants to audit the figures, and lawyers to check all contracts, and hopefully prepare a ‘Heads of Terms’, but you may not feel you need a Business Advisor as well.
However, the truth is, external business advice is exactly what you need at this point. This advice can help you read between the lines, to understand why the seller is really selling, and what risks may be lurking around the corner. This advice is generally inexpensive compared to the potential purchase price, and will hopefully ensure that once the purchase is completed, there are no unwelcome surprises.
4) Buy right, a penny saved…
When you first see the business, it looks good, in line with what you’d been seeking. As due diligence proceeds, you remain happy that this is the right business for you, but you realise it will require more funding than you thought for the first few months, and there are various unexpected costs that are likely to arise. Mention these immediately to the seller in relation to the asking price. Of course, you don’t want to rock the boat, but now is the time to start working on reducing the purchase price.
In addition, sellers will often take the projections they provide as justification for a high asking price, but you do not have to pay for their projections. You are paying for the current business. There may be a goodwill element if the business has a good reputation in the marketplace, but projections should have no bearing on the price. As the deal gets nearer to closing, continue to be bold in trying to push down the purchase price, ideally with rational explanations for each demand.
Remember, the seller also wants to sell, and while he wants to maximise the price, he is also looking forward to the day the deal goes through and he can stop paying all the bills, expenses, etc. As you begin to make profits in the future, you will so appreciate all the reductions in the purchase price, which will enable you to recoup your investment that much quicker.
5) Just walk away
As due diligence proceeds you may find things you don’t like. Perhaps you find the staff difficult, in particular the senior staff, or the overall atmosphere is not pleasant. Perhaps you discover that the weaknesses in the business are not really in areas where you have expertise. It may be that there is no specific reason why you have an uncomfortable feeling, but you do.
But at the same time, you think of all the time, energy and money you have already spent looking at the business, and you are loathe to walk away. Listen to your instincts, and if they say walk, then walk. The costs are minimal compared to what you could lose if you proceed unwisely.