The process of buying a business requires time, energy, effort, and money. Unfortunately, many entrepreneurs and investors end up wasting these resources by falling victim to common omissions and inaccuracies.
By making yourself aware of common obstacles, you can avoid a similar fate of less prepared others. In this blog post, we look at four common oversights when buying a business as a going concern.
Anyone who has done it firsthand knows, the process of buying a business takes time, and it’s often heavily influenced by what you’ve not done, i.e. due diligence. All business deals need objectivity, not emotion. No matter how much you want, the company rushing the process can result in costly omissions and errors.
So what are some of the mistakes commonly made by novice purchasers when buying a business?
1. Deal Breakers
According to Apex Business Advisors’ blog post, the three main reasons deals fall apart are:
- Failure to disclose important information a buyer may need to make an informed decision regarding whether to buy or not to buy
- Business neglect and a lack of regard for things like clean books, timely tax payments, and coherent financial statements
- Poor attitudes and emotion-driven decision making
This third factor is far more common than most would care to admit. It gets played out in a variety of ways, including inflated egos. Too much ego pumping can lead to a toxic relationship between the buyer and seller, which ultimately squashes the collaborative ‘give and take’ that needs to happen throughout the negotiation process.
A healthy professional attitude from the outset embraces the process and all of its requirements, including ticking off the checklists, doing the due diligence, and following the steps involved without becoming frustrated and cynical.
How you communicate during the process can sway the outcome in your favour. Remember when buying a business it’s mostly about the numbers. Get this right, and both parties are satisfied with the deal, i.e. the buyer agrees to pay a price that works for the seller. Stay objective, and you’ll come out ahead.
2 Lack of Due Diligence
If you’re doing things the right way, you should feel like you’re overstepping and asking too much of the seller (in terms of information and transparency). You should almost feel slightly uncomfortable and awkward – like you’re digging too deep into something that isn’t yours. But here’s the thing: It’s about to be yours! So you have every right to sniff around.
There’s never been a case of a buyer who did too much due diligence on the front end of buying a business. But there have been plenty of instances where buyers didn’t do enough.
Surprises are a bad thing in a business transaction. The majority of your due diligence should ideally be done before the negotiations begin. This includes:
- What assets does the business own? What about debts and liabilities?
- Are there any liens against the business, if ‘yes’, who is responsible for paying what at closing?
- Are there any lawsuits or litigation holds?
From a legal perspective, it’s a good idea to ask for copies of all agreements the business has in place with business partners. You’ll also want to gather information on licenses, insurance policies, and documents as they relate to intellectual property (patents and trademarks).
Your attorney should review any legal element to ensure the agreements are enforceable and that you, as the new owner, will have all rights conveyed without any encumbrances.
These are just the big cornerstones of the due diligence process. There are dozens of much smaller elements that must be analyzed as well.
3. Incompetent Advisors
Your advisors/brokers can make or break your purchase of the business. A good team of advisors – meaning people who are skilled, experienced, accessible, and ethical – will hold your hand throughout the entire process and go to bat for you so that you can focus on your big-picture strategy. The problem is that many buyers choose incompetent advisors.
Incompetent advisors are much more focused on their commission check than on facilitating a buyer-friendly transaction that protects their clients’ needs and best interests. They’re difficult to get a hold of and will often get in the way of negotiations, rather than helping you maximize leverage.
You should spend a lot of time researching business advisors and selecting one that aligns with your needs and objectives.
4. Insufficient Cash on Hand
It’s not uncommon for a buyer to pour so much of their assets into the business’s purchase that they end up having insufficient cash on hand to operate the business after taking ownership.
The key to avoiding this problem is to run multiple cash flow projections so that you can determine what a conservative level of cash would be for the first year of ownership. (Make sure to account for all of those one-time expenses that you’ll need to make in the first year.)
Summing Up – Smooth Driving Ahead
When it comes to buying a business, consider this analogy: It’s not enough to have a map in your hand. You also need to be prepared to make a few detours and pit stops along the way. The destination might look the same, but the path you take can change. By preparing yourself for the many directions this thing could take, you’ll put yourself in a better place to enjoy a successful outcome.
Prepare for every possible outcome, and you will be in the best possible position to buy a business worthy of your investment! 🙂