Top 5 Mistakes when Buying a Small Business

Considering whether to buy a business or not? There are many things to consider when buying a business. Understanding the most common mistakes to avoid when buying a small business will help ensure that your own business will not flop.

Paying Too Much

You may spend too much on buying a business if you do not thoroughly investigate the business, its customers, its suppliers, its competition, and its industry before you buy. It is also important to understand why the business is being sold

Buying the Wrong Type of Business

In the urge to own a new business, some people buy a business that does not fit their particular set of skills.  Is this business for you? What type of business is it? Does it interest you? Do you have the appropriate experience and education to make it grow? Don’t buy a flower shop when your experience is in electrical.

Not Using Experts

Consult with experts during the process of buying a business. At a bare minimum, you should enlist the aid of an attorney and a CPA. The attorney can prepare and review documents, help structure the deal and make you aware of legal and liability issues. The CPA can provide a financial analysis of the business and advise you on tax and accounting matters. You should also consider adding a professional business broker to your team. They can help with negotiating a price, and provide valuable information about the business industry, competition, and economic conditions.

Due Diligence

You should verify all the information about the business before buying, and recognize the importance of Due Diligence in the transaction. Due diligence is the time when you ascertain the financial health of the business.  You can do some of the investigating yourself to save money, but do not cut too many corners – it may cost you in the long run.

Making Internal Changes Too Quickly

Huge internal changes can unnecessarily disrupt the business and lead to loss of valuable talent.  You risk alienation long-time employees and customers. Unless the business is in bad financial condition and needs immediate action, it’s better to take some time to get to know the business, employees and customers before making huge changes. This is a perfect time to solicit suggestions from employees and customers.

Buying a business is a complicated and sometimes emotional process. By avoiding these costly mistakes, you can prevent turning your dream into a nightmare.

Getting the advice you need when buying a business

Anyone who wants to buy a business will need some good advice – be it a seasoned investor or a first-time buyer. They will want answers to such questions as, “What is the business worth?” and “When will I start to show cash flow?”  Once the reality of buying a business starts to sink in, additional concerns will arise. However, finding good advice maybe easier than one thinks. 

In any situation, free advice is both available and worthwhile. Even the cost of paying for such advice is nominal and many times well worth it. There are a number of resources available to prospective business owners. Here are some places to start.

Websites - Entreprenuer.com is for entrepreneurs and small business owners. You can meet fellow entrepreneurs, business experts, business owners, investors, and get many of your questions answered through their forums. LittleBizTrader.com also has a small business blog that educates on the buy/sell process.

Local chamber of commerce – As a means for networking and getting answerers to local questions in your area, the chamber of commerce is an excellent resource. Many local business owners are a part of this organization, and you can also obtain a list of reliable business brokers in the area.

Business brokers- are trained professionals who help business owners save time and money when trying to sell their businesses.  They work much like realtors in that they charge a commission which gives them great incentive to get you the best price possible for your business. If you have questions, they got answers.

SBA – The U.S. Small Business Administration is a terrific resource if you wish to buy a business. First, their web site is organized on a state-by-state basis, with listings of companies for sale as well as direct links to every Secretary of State’s office. This information is valuable because you will learn about things like business licenses, taxes, employment regulations, and many other factors necessary to the purchase and successful operation of a business. The SBA also acts as a funding resource.

Lending institutions – Bankers and credit unions are a great resource to find financing for a new venture. They also will give you great insight on whether a venture is worth pursuing. Begin the process of creating a professional relationship with your local broker and you will have a great resource for life.

Professionals - We strongly recommend you consult professional business advisors including business brokers, business attorneys, CPA’s, financial advisors, certified business appraisers, and tax advisors before making any financial or investment decisions. This will save a lot of headaches in the future.