9 Frequent Mistakes When Buying A Small Business

Buying a small business is the shortest route to entrepreneurship for driven individuals. It does not involve planning, executing and building an entity from the ground up, which is a financially and physically draining process. It comes with the benefit of taking over an existing venture that has an established customer base, list of suppliers, sales figures and annual turnover.

However, the buyers must be careful while choosing the entity to avoid getting stuck with a debt-ridden or unstable business. It is essential to conduct careful due diligence on the company and its financial status to check its future viability. Here is a list of nine frequent mistakes that should be avoided when buying a small business.

1. Choosing the Wrong Industry

The first step while purchasing a business is to identify the industry which will be the best fit for acquisition. Assess your skill set and experience and how it can help in your entrepreneurial journey. If you choose an industry that is unfamiliar and complex to understand for an amateur, it can be challenging to make it work despite all the support.

You need to have an inclination or some prior knowledge about the field to pick its working procedures quickly and leverage them for growth. You must have the qualities and strengths needed to take the business forward. For example, running a retail business will need effective communication, interpersonal and sales skills.

2. Not Evaluating the Seller’s Motive

The reason for sale can vary from genuine to distressed sale. As a buyer, you need to assess the real motive behind the sale to avoid getting deceived. Deceitful sellers may put up a failed business for sale and display it as a thriving entity by inflating its financial reports.

They can also try to hide an internal dispute with suppliers or employees or ongoing litigation that has tarnished their image among customers. Thus, the buyer needs to find a trustworthy seller who is not lying or cheating others. Looking at the historic performance of the business is vital in this regard.

3. Failing to Review the Financials

When people sell business online, they mention the financial details in the listing, such as net profit, annual turnover and stock. However, taking these figures at face value is wrong. You need to hire an accountant who can verify the financial data provided by the seller and assess its bottom line and profitability.

Examining the financial statements for the past few years and future projections is necessary to gauge its financial health. Also, the accountant must look for loopholes like exceptional sales in the last few months that might have been created to sell quickly.

4. Ignoring the Work Culture

The workplace environment is of utmost importance for the buyer because it indicates how the business functions. You need to find an office that has a positive culture and agile procedures. It must promote teamwork, appreciation and recognition and constant sharing of information.

The entire organisation should work in a streamlined manner and workers should have their roles and responsibilities clearly defined. It ensures that there is no mismanagement or need for micromanagement.

5. Overlooking Potential of the Business

Besides the financial health of the business, the buyer also needs to check the calibre of employees, number of customers, competitors, stakeholders, etc. For example, the business might be riding high on success because of one major client. However, if it loses this client, it will fail. Thus, it is essential to conduct thorough due diligence on the sustainability of the entity. Make sure to check the goodwill, tangible assets, product demand, lease agreement, permits, insurance, etc., before going ahead with the deal.

6. Overestimating the Price

The price quoted by the seller has to be negotiated to come down to a fair valuation of the business. However, you need the help of a business broker and an accountant to calculate the right value of the business. Make sure that your accountant uses different evaluation methods, such as current market trends and the cost of all the assets. Another method requires calculating the cost of setting up the same business in the current conditions. All these valuations will help you ascertain a fair value to the entity so that you do not overpay.

7. Not Planning the Handover

Many entrepreneurs who sell business online are in a hurry to leave because they are retiring or starting a new venture. It leaves them with no time to train the new owner in their role. It can make the management weak and leave the leadership needing clarification.

Thus, buyers must ask for training during the transition period to understand the standard working procedures, policies, and organisational management.

8. Exceeding Your Budget

The buyer should not agree to a price that is higher than the valuation of the business, even if it is thriving. You can find a better deal at the same price if you wait for some time. Spending more than required will affect your budget, working capital and savings.

It can make growing the business in the initial years a task and leave you with a deficit. Thus, stick to your budget and find a business that fits into it without making any changes.

9. Entering an Unfavourable Contract

The purchase agreement is a legally binding contract that cannot be changed once it is signed by all parties. Thus, it is imperative to read the clauses carefully and make sure that they match your requirements.

The agreement must have details about the transfer of ownership of all the assets, licenses, permits and intellectual property. Ask your lawyer to check the document and sign it after a systematic examination.

Conclusion

Buying a business requires a lot of research and calculations. It is easy to make mistakes when you are excited to close the deal. Ensure you hire experts to guide and check every aspect of the sale before signing the contract.