|
Top 5 Mistakes Business Buyers
Make When Buying A Business
Buying a business is never simple. Besides the obvious business issues, there are legal concerns, and of course people concerns. But when the right price meets the right opportunity, the outcome can be a shortcut to reaching your business goals. Of course, you have to do your research, crunch the numbers thoroughly, and avoid making the following mistakes that can kill your new venture.
Buying A Business Mistake 1: Buying the wrong business
“Do what you love and the money will follow,” may not be as true as we’d like to hope, but the converse certainly is. Buying a business you don’t love will not only ruin the business, it can ruin your life. Make sure you have a passion for whatever it is. That passion, by the way, may not be for the product or service – although it would be a great way to go. You may instead be passionate about the marketing, or the sales. Just make sure you can get truly excited about what you’ll be doing for the next few years. And of course, make sure the business somehow makes good use of your personal skill set.
Buying A Business Mistake 2: Not doing your due diligence.
Due diligence on a business opportunity goes far beyond analyzing the financial statements. You need to understand the customers, the market, the business reputation and positioning, the vendors, the competitive space, the debt, and a host of other factors. And you have to dig deep. A business may appear to be all sweetness and light on the surface, but be riddled with problems underneath. As architect Le Corbusier said, “God is in the details.” Examine them – all of them – before you make your final decision.
Buying A Business Mistake 3: Not understanding why the seller is selling.
An owner may say they want to retire, but the real fact is that he is losing his lease. Another says she is simply tired of the business and wants to move on, when in reality a major competitor is coming to town, and she is scared out of her wits. Find out the real reason the business is being sold. You may still decide to go ahead, and that information may help you negotiate a better deal.
Buying A Business Mistake 4: Not having a good contract
Just like when buying a home, there are many points to negotiate besides the price. There are the payment terms, financing, covenants about the property, inventory issues, accounts receivable, debt and other financial encumbrances like liens, intellectual property issues like trademarks, patents and copyright ownership, non-compete clauses, and dozens of other details. While a strong contract won’t save a bad business, a weak one can kill you. Don’t proceed along any lines where major questions are unanswered. And make sure you hire a lawyer familiar with business purchases to review your agreement.
Buying A Business Mistake 5: Not knowing the real business valuation
It’s easy to overpay for a business when you don’t have a proper business valuation. Most business pricing models have two major components: a base, usually revenue or profit, and a multiplier. To get the base you need a clear view of the revenue picture from previous years. Get financial statements and sales journals going back as long as you can – up to five years. Do the same for expenses. Each industry has it’s own basic model for comparison. Some industries, such as software, focus on revenue or sales while most others focus on earnings, or an adjustment to earnings called EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization.) The multiplier is also industry based, and can range all over the map. The company’s assets and liabilities – both real and contingent – as well as the strength and consistency of cash flow, also affect the price you are willing to pay. It’s a good idea to get a professional evaluation of the company, if only to use as a starting point or bolster your negotiating position.
Here is a sixth mistake that is less obvious to many buyers, yet should actually be the first thing you consider when deciding on a business to purchase
Bonus Buying a Business Mistake: Not having a clear picture of the future
Remember the multiplier I mentioned above? That multiplier is actually the number of years it will take to recoup the price you just paid for the business, assuming it doesn't’t grow (or shrink.) Having a clear view of the future – and how much you can impact that future – is the most important information you can have when purchasing a business. If you have to pay 3x earnings, and yet you believe you can double the business in twelve months, that is a good deal. If you have to pay 10x earnings, and you expect 10% growth – it’s going to take a very long time to make any money on the deal.
If you think the industry is going to take off, or you can expand revenues rapidly and flip the business – you may be acquiring in to a gold mine.
Even if it doesn't’t work out exactly, you must have some view of the future. This view includes industry trends, the overall market, regulations, societal changes, technical trends, as well as your ability to grow this particular business through better sales, improved marketing, more products, effective service, documented systems, and increased an capital base. Each of these enhancements can dramatically improve the existing business.
Just because you don’t make these mistakes doesn't’t mean you will be successful, but avoiding them will definitely increase the odds in your favor.
To find out more about profitably buying a business along with other important business strategy and business acceleration ideas, contact Paul Lemberg, CEO of Axcelus: Advanced Business Acceleration for Entrepreneurs. Axcelus helps business owners increase revenues, profits and value in the shortest time possible using proven systems and expert advice. Paul is available for consulting and speaking at your next meeting or retreat.