Buying a business is an attractive option if you want to run your own business or expand an existing business. It means you don’t have to start from scratch as, depending on the business you buy, you will get an existing brand as well as, potentially, products, a customer base, staff, a way of working, and more.
There are a lot of pitfalls when buying a business, however, even one that appears successful. Here are some common mistakes you should avoid.
Not Assessing Your Capabilities
You should consider your capabilities whether you are starting a business from scratch or buying a business. Of course, not having the capabilities does not have to prevent you from running the business as you can obtain the capabilities either by improving your skills or getting them through other people. You need to be aware of any potential weaknesses before you can work on them, though.
There is also another issue, however, that is unique to buying a business. This is the fact you will probably want and/or need to make changes to the business once you take over. That means you need to assess your capabilities to put in place the necessary changes. Remember, you may be dealing with people who are passionate, fearful, resentful, and/or suspicious. This makes change management difficult.
Not Doing Proper Due Diligence
It doesn’t matter how exciting or great a business looks, you always have to scratch below the surface. After all, we have all sold something at some stage in our lives where we have made it look as good as it can before the potential buyers arrive for an inspection – a car or a property, for example. People selling a business do exactly the same thing, so you have to get in as deep as possible so you understand what is really going on.
Not Negotiating Properly
In many situations, the buyer has the upper hand in a business sale situation. That doesn’t mean buyers always get favourable terms. The only way you can ensure this happens is to negotiate properly – get a full understanding of the business you are buying, understand why it is being sold, be clear what you want to do with it, and set parameters for your negotiation that will allow you deliver on those objectives.
Also, it is rarely a good idea to pay for potential when buying a business. It is much more prudent to value a business based on past performance.
Spending Too Much
This doesn’t mean paying more for a business than what it is worth, although that is obviously a mistake too. Instead, it means paying more than you can afford. If you over reach your finances to close the deal, you run the risk of not being in a position to make the business a success, i.e. because your debt financing commitments are too much or because you don’t have money left to invest.
Not Getting Advice
Before buying any business, you should get professional advice. This includes financial advice on things like the accounts of the business and the finance options you have available. It also includes advice from experts in the field. This is particularly important if you are buying a business in an industry or sector that you are not familiar with.
Finally, don’t be rushed into buying a business. Always take your time so you understand exactly what you are buying and why.
For more help and advice, including advice when buying a business, please contact a member of the Gilroy Gannon team.