Tips – Key Mistakes To Avoid When Buying A Business
Starting up a new business is a mammoth task – a marathon and not a sprint. Often it can take years before reaching the point where you start making real money. Up until this point, it can be a process noted for blood sweat and tears. Being a business person can be a challenging, lonely and stressful experience. Acquiring a business instead of building one from the ground up can provide a massive shortcut.
Instead of being a startup entrepreneur, you can acquire a business and become an established business owner. Instead of working for years on a startup, it’s possible to acquire a business and instead use your skills to put your own stamp on the business and take it in the direction of your choice.
1 Not allowing enough time to search for and analyse a potential business acquisition
Finding the right business to purchase can take time. It is possible to be lucky and find a suitable business early on in your search, or to find out about a potential business opportunity before it is advertised. It’s very important to allow yourself time to find the right business, and not to rush the process due to wanting to get things done or wrapped up fast. Remember business can be a risk, and it’s better not to buy than to buy a bad business.
2 Not understanding the reasons for the sale of the business
A business owner who has built their business from the ground up will naturally be attached to their business. This may cause them to have doubts about selling their business, or they may overvalue their enterprise. They may worry about how their business will be managed, how their staff and customers will be taken care of. When meeting a business owner, it’s important to acknowledge and appreciate their achievements. This will help to build constructive communication, and will help you to understand the reasons for the business being up for sale, along with how the business is run and operated. Be interested and ask relevant questions, but avoid giving your opinion on what you would do differently. Building a successful business is a big achievement and a business owner may have a range of different buyers interested in acquiring the business. Don’t create unnecessary obstacles or barriers. Be authentic, genuine and interested.
3 Understand the numbers and the factors driving the key numbers in the business
The numbers in a business are everything. Through the due diligence process, you can review and analyse relevant information. You want to understand how and why the business generates revenue and profits. Remember that the seller, and if they are using a business broker, their business broker will want to make the financials look as good as possible. You should lookout for any anomalies like recent increases or above industry averages etc. You should review historical as well as current data, in addition to gaining an industry overview.
4 Not identifying the real strengths of the business
You should also carry out a SWOT analysis – covering the business Strengths, Weaknesses, Opportunities and Threats. You want to look out for and understand what makes the business achieve the results it is delivering. What are the competitive advantages of the business? For example the brand, database assets, production processes, reputation etc. Some businesses are built on the back of the business owner’s personal network, relationships and reputation. Many would-be business owners overlook this fact. To understand the detail and have a broad understanding and overview of the business operations, you will need to go and do your research – not just online but in person. Act like an investigator or mystery shopper and you will gain valuable insights. You should also review historical financial information, financial accounts, annual reports, staff records, supplier contracts etc. You should also review past and current contracts for employees and suppliers – you want to understand any issues which may exist. You are looking to build a range of data sources so that you can confirm or reject your assumptions, and gain confidence in the business sustainability. You should also gain a clear picture of the business online presence including reputation and customer reviews etc.
How does the company compare to competitors across key areas? What is the market share of the company? What compliance and permits are required? What insurance is needed?
You should also trust your intuition, and never be afraid to walk away. There will always be another business deal to buy – you want to make sure you are buying the right business.
5 Overvaluing a business
It’s vital to work with expert advisors. They will help you carry out your due diligence efficiently, do not cut costs in this area as this is likely to be a riskier approach – you want to acquire the right business at the right price, not the wrong business, or the right business at the wrong price.
Whilst there are different business valuation methods and approaches. Use a common sense approach and make sure the numbers make sense to you.
You also need to factor in the income you plan to draw from the business, in addition to any staff you plan to hire and costs for any expenses you plan to incur, in addition to day to day operational expenses.