Buying a business is a complex process and there are plenty of pitfalls along the way to trap the unwary. It’s best to take an orderly and organised approach, ensuring that your research is as thorough as it can be before you take the plunge.
So, what are the most common mistakes made when buying a business?
1. Buying a Business That’s Wrong for You
If your business acquisition represents a lifestyle change as well as a financial investment, it’s important to take the time to find the right business. Most entrepreneurs do best in a business that suits their skills, knowledge, interests, and personality – even if they’re not planning to be fully hands-on. Choose the right business and you’ll be on track for the freedom, flexibility and sense of achievement that owning a business brings. Opt for a business that isn’t such a good fit and you could be facing years of anxiety, frustration and debt.
2. Ignoring Due Diligence
Dotting the i’s and crossing the t’s can seem like a boring, time-consuming and expensive optional extra. You’ve found a business that you love and just want to get on with running it – what could possibly go wrong? Well, you could end up paying too much for a business that’s not quite as successful as it seems, operating in a declining market with outstanding debts and unsustainable overheads. In short, you could easily end up with a white elephant. Gathering a trusted team of experts who can do a solid job of due diligence will help you avoid buying the wrong business or paying too much for it.
3. Paying for Potential
Sellers will often try to set their sales price based on the projected value of the business. For instance, a holiday letting business that has an average occupancy of 40 percent may be worth £400K; if the occupancy rate was 80 percent, its value could be double. But a buyer can’t be expected to pay a price based on a notional return. If you pay for potential, you’ll be rewarding the seller for the hard work you invest in realising it. Make sure the price of the business is based on its current, not projected, value.
4. Banking on Change
Many businesses have an established brand that reflects their values and appeals to their customer base – ignore this at your peril. If you’re planning to change the essence of what makes the business successful, you could wipe out your profits overnight. This is why it’s important to consider the company culture when thinking about buying a business. For instance, if you buy a specialist chocolate brand that leverages its organic, Fair Trade credentials, but plans to improve profit margins by cutting the cost of ingredients, you could find yourself without a customer base. Playing fast and loose with company culture can decimate some businesses.
5. Overextending Yourself
A common mistake among business hunters is to buy a business that’s out of their budget. Running a business requires capital and although successful businesses can generate enough revenue to cover expenses, you’ll always need cash reserves to carry you through tough times. If you spend all your money acquiring a company, you won’t have the means to cover shortfalls when they occur and just a small amount of debt could bankrupt your new business. Stick to your budget and only commit to a business when you have the funds secured to buy it and keep it afloat in the first few years.