4. Common Mistakes that Must Be Avoided
Some of the most common mistakes are:
- Acquisition of the business at the seller’s price– The buyer does not consider recovering the investment and starts negotiations on the purchase price without taking into account a normal recovery period.
- Lack of cash– Some buyers use all the financial resources to acquire the business, although cash management in the start-up phase of any new or existing business is fundamental to short-term success. They fail to anticipate the necessary cash flow and possible unforeseen events that may require more capital. In addition, there must be some reserve revenue for business building, marketing, and PR efforts. So, if you have $ 250,000 invested, make sure you do not spend the entire amount purchasing the business. Keep some of the capital. Although figures vary from industry to industry, a common amount could be 10%. In addition, it may be necessary to save some money for working capital, which for many businesses is the equivalent of the amount of expenses for about three months.
- Buying all accounts receivables– In general, it is common sense to buy receivables, unless they are older than 90, 120 days or more. Many times, buyers take all receivables, even those over 90 days. This can be very risky because an old debt will be difficult to collect. For receivables older than 90 days, let the seller collect them.
- Unable to check all data- Most business buyers accept all the information and data provided by the seller at face value, without checking them with an accountant. Most sellers want to get paid for the business as soon as possible, and buyers often decide to take over all assets, such as receivables, equipment inventory, and sometimes too much inventory of raw materials. The seller will try to convince the buyer to accept anything, especially if he knows that the buyer really wants the business.
- Difficult financing programs- Future novice business owners often overestimate their earnings during the first year and accept unnecessarily high payment plans. During the first year of operation, the owner can experience many unpredictable costs, such as equipment malfunctions, employee problems, etc. For this reason, it is logical to have a payment program that starts fairly easy, then it becomes gradually harder. This is something that can be negotiated with the seller under its funding conditions.
- Unfair treatment of the seller– People think that because they buy his business, the seller is at their mercy. Too often, the buyer is cold, rigid, capricious, with unjustified or unfulfilled claims. Even if you are interested in buying a business, it does not mean that you will not have to pay attention to this complex business transfer process and the interaction with the seller.