I have been involved in buying and selling business for more than twenty years as an owner-operator, advisor and investor. Over the past ten years, I have worked with thousands of prospective business buyers through the various guides my company publishes. From these experiences, I have seen a number of common mistakes many people make over and over again; all of which are easy to avoid, if you are properly prepared.
Choosing the Wrong Business
This is undoubtedly the biggest challenge prospective business buyers face and it is remarkable how many end up buying the wrong one. First and foremost, buyers have to take a brutally honest look at their individual skills and weaknesses. When choosing a business, this is not the time to fool yourself. In order to be successful, your strongest skills must match the precise needs of a specific business. in other words, whatever you do best must be the single most important driving factor of the revenues and profits of any business you consider purchasing.
Conversely, a business cannot suffer from your weaknesses, nor should you attempt to learn a critical skill the business needs on the job. Certainly you will have to learn the workings of a business, but talent-wise, you have to be able to step in and operate it. For example, if your skills lie in marketing, or sales, or operations or production, you need to acquire a business where that specific skill is the driver of the business.
Overpaying For A Business
I can write an entire book on valuations (actually I have) since it is such a comprehensive component of the business buying process however, I shall endeavor to highlight the most important considerations.
Most prospective business buyers have never conducted a detailed valuation and so they rely upon the seller’s asking price, or a broker’s input, or an accountant’s perspective and all of these often leads them down the wrong road.
Buyers must keep in mind that valuations are an art; not a science. Next, the seller’s asking price of a business has no bearing on the final purchase price and terms and therefore one must consider the deal structure as well. Valuations must be based upon provable financial data while factoring in the potential return on investment. A very important point is regarding assets since many inexperienced buyers place far too much emphasis on the hard assets they will be acquiring. While important, assets serve two main purposes: first, they are solely a means to generate revenue and second, they can be leveraged to finance the deal.
Although it is always recommended to use a number of methods to get some general valuation parameters, the income multiplier formula is the most effective methodology to establish a valuation of a small business.
Spending Endless Hours Searching Listings and Never Finding A Good One To Buy
The Internet is the greatest blessing and curse for anyone who wants to buy a business. There are hundreds of thousands of businesses listed for sale and it does not cost anything to look (and look and look and look). That is precisely what most people do and ultimately, they do not achieve any results.
Yes, online listings of businesses for sale can be a very helpful tool. However, ones search must be streamlined. Targeting specific sectors and narrowing the scope of the type of business you want to buy is critical. Sure it is good to be open-minded, but to a point. The quicker you can focus into a particular industry – the better.
Also, do not limit the search to online business for sale listings. Most businesses that are sold never get listed for sale. There is a wealth of opportunity available by directly soliciting potential business to buy so again, spread the search and cover all bases.
Hiring The Wrong Advisors – If You Have a Toothache Don’t Call A Plummer
It amazes me how petty and foolish many buyers become when they need to outside assistance whether legal, professional or advisory. Regardless of the size business being acquired, surround yourself with the best possible team of advisors you can afford.
The good news is that an attorneys role can and should be limited within the process (the lesson here: lawyers do not make deals; they break them, so use them only for what they are skilled in doing). The same holds true with accountants – they have their role for the financial review period and for tax matters, but they are not, in most cases, valuation experts.
If you do not have a wealth of experience in this process, your first step is to invest a bit of time to prepare and educate yourself about each step. Next, align yourself with an advisor who will solely represent your best interests and can assist and guide you through the various stages. This is not a business broker who is being paid a commission by the seller; you need someone on your team who is experienced at buying business and can dispense unbiased advice to you. Their sole agenda is to make sure you buy the right business at the right price and terms.
Richard Parker is the author and publisher of, “How to Buy a Good Business at a Great Price,” the best “how to” publication available on business buying. He can be reached at www.diomo.com or firstname.lastname@example.org.