How to Buy a Business

If you are looking to buy a business you should be made aware of some common mistakes that are made during the process.

Unscrupulous sellers

Be cautious and try to identify those business sellers that are looking to take advantage of people looking at buying a business. Don’t merely rely on what the vendor tells you. Take it with a grain of salt and make that that every ‘fact’ that you are told is properly vetted and verified.

You can do this during the due diligence process or before. If something doesn’t seem right to you about a seller or business it’s a good idea to simply walk away.

Hope for the best... but prepare for the worst

Assume that you found the business you were looking for. You carefully checked out all the facts about the operations, the financials, operating licence, etc. In short – you have completed a thorough examination of the business and the seller has fulfilled his obligations to you.

You are about to go through with the transaction. When you’re looking to buy a business, try to imagine what other ‘hiccups’ could happen and try to mitigate them as best as you can.

Perhaps on your first day as the new owner some key staff members decide to suddenly resign? Perhaps a major customer decides that he doesn’t want to deal with a new inexperienced business owner and shops his business elsewhere? Perhaps a new competitor announces they are opening up down the street?

Try to mitigate any exposure you might have as a new business owner, but try not to be too leery.

The point is that when you are looking to buy a business, the first few months are critical as a new owner as you get your feet wet and learn the ropes.

Try to minimize any risk exposure you may have before you buy and be prepared if any of these things do happen to you.

Backup any facts, projections or ‘guesstimates’

When you’re looking to buy a business you may be presented with a company’s historic growth rates, an owner’s estimates about future growth and opinions on the market and future company performance.

Getting a current owner’s honest opinion about the business’s performance and reasons attributed to past track record is certainly important when looking to buy a business. Please try to rely on facts though and not merely opinion.

For example, assume you are looking buying a sign company and the owner attributes past revenue growth of 15% per year to his superior quality, customer service or market loyalty.

Upon closer review you might discover that the growth, in fact, was due to very little competition in the market but now a major competitor has recently opened up down the street. Try to look at ‘facts’ presented to with a grain of salt.

Usually, if you ask the simple question “why” you may discover that things happen for different reasons. Also, be aware when you are looking to buy a business that past financial performance does not guarantee future success. In other words, if a company grows at a rate of 20% per year for the past 3 years, this is not a reason to assume it will grow at that rate in the future.

Ask the question ‘why’ and you might discover the reasons behind the growth and determine if that is realistic for the future.

When you are looking to buy a business it is a good idea to consult with a lawyer and accountant to help you answer the question “why” and determine if the business is really all that it appears to be.

All content posted is not a substitute for legal, accounting or other professional advice and not intended to be relied on as such. We always recommend that you contact your own advisors for their input.