10 Common Mistakes When Buying a Small Business

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Buying a small business is a huge investment and involves an extensive amount of research, contemplation, and preparation. Nevertheless, many potential buyers make the same mistakes. Common oversights often arise from not carefully researching the industry, overlooking available resources, failing to speak with current owners or their advisors about the actual numbers associated with the sale, and overestimating financial forecast capabilities.

If you consider yourself a potential small business owner, it is important to ensure that you address all of these issues before you buy a business.

In this article, Armen Nazarian Business Brokers will discuss the common mistakes you can make when buying a small business and how you can avoid them. As your knowledgeable Michigan business brokers, we’ll share our insight on why the following can be detrimental to your investment:

  • Not asking yourself why the owner wants the business sold.
  • Performing due diligence from behind your desk.
  • Not having cash leftover for unexpected expenses.
  • Not considering your interests and lifestyle.
  • Not knowing your financial requirements.
  • Making a lot of changes too fast in the very beginning.
  • Relying on the existing customer base.
  • Ignoring the established company culture.
  • Not thinking about what happens after the sale.
  • Trying to find a business yourself.

Keep reading to learn more about the 10 common mistakes you can make before you seal the deal.

1. Unawareness About Why the Owner Is Selling a Business

One of the most fundamental practices in business acquisitions is learning why an owner is selling their business in the first place. In most cases, the reasons for wanting to sell a business could be something as innocuous as them wanting to retire and no longer being interested in operating the business. Some may feel burnout by the demands of their clients or industry, while others may need money to finance a family concern, illness, or alternative business plan.

If any of the reasons listed above are the reason a small business owner wants to sell, then buying the business wouldn’t be that much of a risk. However, there are times when an owner is selling a business because of debt, an increase in competition, or other concerning factors. Knowing their reason for selling and taking a deep dive into the financials yourself before buying a business can help you determine if the purchase is worth it.

Increase in Competition

Competition is a reality businesses must face. However, some business owners cannot keep up with the competition. As other companies become fiercer and gain advantages over them, then the business you are interested in buying might start losing profit. The business owner may not be able to keep up and will try to sell the company before it’s too late. Understanding what you might be potentially facing if you buy the company will help you make more informed decisions and comprehensive plans post-purchase.

Unpaid Debt and Anomalous Finances

When you purchase a business, you might also be inheriting all the debt associated with it. You could be facing irregular finances that will need a lot of effort to untangle. That’s why you should evaluate every financial aspect of the business, from profits and cash flow to debt and expenses.

Unprofitable Location

Some industries are heavily reliant on foot traffic. This includes retail stores, restaurants, and service establishments. As new commercial centers rise or new highways are built, the business’s location may no longer attract as many patrons as before. If the owner is selling because of this reason, then you might need to step back and consider if purchasing the business is worth it.

Legal Issues

An owner might try to sell a business while in the middle of litigation. If you’re going to buy the company, then you might be inheriting these legal liabilities as well. In general, purchasing a business with legal issues is a bad idea.

2. Performing Due Diligence From Behind Your Desk

Many business buyers make this mistake, settling only for superficial due diligence that relies on numbers and documents. As your trusted Michigan business brokers, we want to emphasize that there’s valuable insight to be found in the field. Visiting the on-site location will help you learn about the company image, culture, customers, and other important factors.

One thing that you have to remember when performing due diligence is that you should act as an investigator. That entails gathering information from various sources, not just relying on what the business gives you. Talk with former employees, investors, industry experts, suppliers, and even competitors.

By talking to these groups, individuals, and entities, you can gain insight about matters like:

  • Sustainability of the proposed profit margin.
  • Customer loyalty.
  • Company image and culture.
  • Product positioning.
  • Customer perception.

Overall, you won’t receive this valuable information if you rely solely on a business valuation or documents and data that the seller provides. As one of the potential buyers, they show you the good parts of the business to convince you to purchase the company. However, you can get a more objective and unbiased perspective if you gather data yourself. What you find will help you decide whether or not to proceed with the sale.

3. Not Having Cash Leftover for Unexpected Expenses

As your reliable business brokerage firm, we want to inform you ahead of time that budgeting is a major consideration in transactions like small business purchases. It might be quite obvious to some people, but many qualified buyers fail to consider unexpected expenses when planning for financing. These extra expenses could quickly dwindle the funding you have allotted to a business acquisition. Then there are also additional expenses post-sale.

Here are some common expenses that you might not have considered yet in your budget:

  • Equipment maintenance: In industries that are heavily reliant on machinery, equipment, and tools, you might need to perform tune-ups or maintenance upon acquisition.
  • Professional fees: Aside from business brokers, you will need to work with accountants, attorneys, and other industry experts during due diligence and data gathering. You’ll need to allocate funds for consultation and professional services.
  • Licensing costs: Most businesses are required to have certain licenses and permits to operate. In addition, the seller will need to transfer the rights of any relevant licenses to you, the qualified buyer. Aside from taking a bit of time, these processes can be costly and should be included in your budget.
  • Franchise fees: If you purchase a business that’s part of a franchise, then you’ll need to pay the additional and ongoing fees associated with it.
  • Lease transfers: In some cases, buying a business also entails buying the building or land upon which the company operates. There are cases when this property is owned by the seller or another landlord. In this case, you’ll need to transfer the lease or enter a new lease contract altogether. There might be additional fees no matter which option you choose.

4. Not Considering Your Interests and Lifestyle

When you invest in a new business, the initial purchase process takes a lot of time and resources. You shouldn’t approach buying a business as a part-time job or a hobby you do in your spare time. To succeed in before and after the sale, you need to be fully committed during the entirety of it. That’s why it’s important to consider your interests and lifestyle when planning on buying a business.

Will you be able to handle the demands of the transaction? How will you go about due diligence? Are you buying this business because of a genuine interest in the industry or because you saw an opportunity to own a company? What are your long-term goals for purchasing this business and operating it? Your answers to these questions should help you consider how your current lifestyle and perspective are going to affect or influence your purchase.

5. Not Knowing Your Financial Requirements

A bigger mistake you can commit than having no money for unexpected expenses is not knowing the financing needs of a company purchase. The buying process is one of the biggest business transactions you could ever make, so you need to have an understanding of where and how to acquire financing.

Buying a business requires a considerable amount of money so you may opt for various financing options. You can always pay out of pocket if you’re able to do so. However, the following are other viable choices:

  • Business acquisition loans: You can get loans from groups like credit unions and the Small Business Administration (SBA). Banks and online lenders are also suitable choices. However, each of these lenders will have unique requirements before you can secure a loan, so make sure you understand and fulfill them beforehand.
  • Seller financing: You can ask the seller to lend you money during the acquisition. It sometimes happens when sellers work with business brokers who advise them to require a downpayment that’s at least one-third of the total amount. This initial value may be too big, so you can request seller financing and pay in installations with interest.
  • Private equity and venture capital: Attracting venture capital and private equity investors can help you pay less for business acquisitions. They will have ownership of company shares and may want an active role in running the business.

6. Making a Lot of Changes Too Fast in the Very Beginning

Once you’ve purchased the business, you might have a ton of ideas and are tempted to make as many changes as possible. This is a common mistake done to address the current problems of the business or to make the quickest profit in the shortest time possible. However, turning around a business will take time.

If you attempt to make too many drastic changes and fail to recognize why certain things are in place, then you could hamper operations, burn out employees, or lose customer loyalty. Implementing changes must be done gradually and through informed decision-making.

7. Relying on the Existing Customer Base

If the business owner is selling for reasons other than failing to make a profit or falling behind the competition, then relying on the existing customers may be a good practice. These people are loyal to the company, and their continued business will help you thrive during the initial years.

However, you should find, expand, and diversify your customer base if the business you acquired is not doing well in profits. You need to remember that the current customers are not enough to reach the company’s revenue goals, so putting your efforts into attracting new ones is paramount.

8. Ignoring the Culture

A business culture refers to a lot of things, from the way employees and leadership work to crisis management and compensation structure. Each industry and company will have its own unique culture, which helps shape its business goals and practices. The culture of a business is one aspect that you should carefully understand before you try to transform or improve it.

It’s not unusual for new business owners to want to make changes to company culture. After all, it might be one of the reasons why the business is not performing well. But as mentioned above, you shouldn’t make drastic changes too quickly and ignore the current culture altogether. First, discover the strengths and weaknesses of the business and make gradual modifications based on those.

9. Not Considering What Happens After the Sale

You may find that everything about the business suits your preferences perfectly: great culture, ideal industry, perfect location, etc. However, it’s a mistake to assume that integration will be seamless. There will be a lot of things that will not go according to plan, especially since the company is under new ownership.

It’s important to consider and prepare for what happens after you purchase the business. What kind of operating model are you going to use? What goals do you have and how will you go about achieving them? You need to have answers to these questions because not having clear plans can affect stakeholder, customer, and employee confidence.

Once you finally own the company, you need to constantly communicate these goals as you reorganize teams, migrate new software, optimize processes, and more.

10. Trying to Find a Business Yourself

Buying a new business in Michigan has its challenges. You’ll need to find the ideal company in your ideal industry, and preferably for the best price. Then, you’ll have to secure financing, negotiate with the owner, and undergo several other steps before you can finally close and own your target business.

All of the above can be overwhelming, especially for first-time business buyers. If you fail in one step or make poor, rushed, or uninformed decisions, then you could lose a lot of money. That’s why you need to work with a Michigan business brokerage.

Professional business brokers understand the business buying process. They will also have listings and networks that allow you to find the ideal company to buy. Partnering with a business brokerage will make the transaction a seamless and hassle-free process.

Work With Experienced Michigan Business Brokers

When you’re looking for business brokers with extensive experience, vast knowledge, and professionalism, Armen Nazarian Business Brokers is the best choice. Under the leadership of our founder, Armen Nazarian, we’ve fully committed ourselves to helping buyers and sellers succeed in their respective transactions.

As your trusted business brokers, we’ll help you avoid the common mistakes mentioned above. Our team will serve as your consultants, providing valuable insight gained from years of experience. We know how the process works inside and out, and we’ll help you find the right business. Our business brokers will work hard to make sure you succeed during and after the sale.

Contact Armen Nazarian Business Brokers

If you’re ready to buy a business, but are hesitant because of the mistakes we’ve outlined above, we understand. It’s a major financial decision, and you want the purchase to be successful. That’s where business brokers in Michigan come in — we can help you make the best decisions and find the ideal company to buy. Reach out to us today at 248-231-7714 to start a conversation about our new listings!

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