Buying a business can be the best decision you ever make as an entrepreneur. Certain missteps, however, can turn a dream venture into a nightmare investment. Listed below are 5 common mistakes people make when purchasing a business, many of which can be avoided by doing your homework beforehand.
Mistake No. 1: Choosing the Wrong Business
It is surprising how many entrepreneurs buy a business that’s completely incompatible with their own background and skill set. To make an enterprise work, the qualifications and abilities of the owner must match the specific needs of the business. For example, someone who dislikes children should not operate a toy store. Know yourself, (i.e. your strengths and weaknesses) and align them with a business.
Mistake No. 2: Not Doing Proper Due Diligence
A business may appear to be a roaring success and even turn a healthy profit. That doesn’t mean there’s not a fly in the ointment. What looks like a sure winner on the surface could be weakened by a pile of outstanding debts owed to the landlord, utility companies, vendors, and other creditors. It can also help find “hidden costs” in the business. For example, is the owner integral in the business delivery of goods or services? If so, is the owner accounting for all of his/her time for performing those services? If the buyer needs to replace the labor, it could be an unanticipated cost that isn’t shown in financial statements. Due diligence can expose these and similar issues before they legally become your problem.
Mistake No. 3: Not Setting Up a Corporation or an LLC
All business acquisitions have a certain element of risk, but many entrepreneurs put their personal assets on the line by failing to set up a corporation or LLC to purchase a new business. Because unforeseen circumstances can cause anything to go wrong, contracts, loan agreements, and even the lease should all be in the name of an entity, not the actual owner. However, even when structured correctly, buyers are likely required to personally guaranty some obligations in the transaction, especially if there is third-party or seller financing involved.
Mistake No. 4: Proceeding Without a Team
Another common mistake is to buy a business without setting up a support team in advance. Instead, an entrepreneur will use the advisory team working for the seller or business broker, both of whom have a vested interest in securing the sale. By assembling your own group of advisors, you will benefit from unbiased advice and important insights as well as access to valuable opportunities.
Mistake No. 5: Failing to Take a Company Culture into Account
This happens a lot. Someone buys a business without considering the existing culture and applies their own, incompatible operating style. Trying to impose regimented corporate protocols on a business that has traditionally been run like a family can cause literal culture shock and have a negative effect on how the staff and customers regard the company.
Buying a new business is always a gamble to some degree, but if you avoid these five mistakes your chances of making the right decision increase.
For informed legal representation during the sourcing and purchasing processes, contact Doida Law Group today. We will help you with everything from researching potential risks to negotiating purchase agreements, leaving you free to plan for future success.