4. Business Mistakes That Can Be Avoided
Buying a business is a very long, complex and subjective process, small errors being almost inevitable. Here are the most common mistakes and some advice on how to avoid or repair them.
Accepting the first asking price
When you decide to make a substantial investment in buying a business, take under consideration the fact that the seller’s asking price is not necessarily correct. Do a thorough investigation and calculate the Return on Investment over a reasonable time span. Only then can you begin negotiating the acquisition price!
Lack of cash
Some buyers use all their financial resources to acquire the business, although an articulate cash management is fundamental to short-term success in the start-up phase of any new or existing business. They fail to anticipate the necessary cash flow and possible unforeseen events that may require more capital.
In addition, keep in mind that you must direct some of the revenue towards business building, marketing, and PR efforts.
So, if you have invested $250,000, make sure not to 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
Generally speaking, it is recommended that buyers also acquire receivables, unless they are older than 90 days. However, many times, investors tend to take over all receivables, even those older than 90 days. This is a very risky strategy, because an old debt will be difficult to collect. Let the seller collect those receivables older than 90 days!
Unable to check all data
Most business buyers accept all information and data provided by the seller at face value, without checking them with an accountant. Most sellers want to close the transaction 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 latter is truly invested in buying the business. Do not accept any kind of deal until you have done your due diligence. Check the accuracy of the data presented by the seller and start the negotiations from there!
Difficult financing programs
Future business owners, especially those in the beginning of their career, often overestimate the first year’s earnings and accept unnecessarily difficult payment plans. The first year in business can be marked with many unpredictable costs, such as equipment malfunctions, employee problems, etc..
To avoid running out of cash, the logical course of action to take is to choose a payment program that starts fairly easy and changes over time, while your company grows. This aspect can be negotiated with the seller, under the funding conditions of the transfer.
Unfair treatment of the seller
Treat the owner of the business you want to acquire and his staff with respect. Avoid being cold, rigid, capricious, with unjustified or unfulfillable claims. Being interested in buying a business does not absolve you from making an effort in the interaction with the seller or from paying attention to this complex business transfer process.