From overlooking key issues to making missteps in negotiations, there are mistakes to avoid when buying a second business. In this article, you’ll learn about some of the most common mistakes buyers make. You’ll also find some actionable advice you can use to navigate around the pitfalls.
1 | Entering the process without a clear objectiveOften, prospective buyers begin their search because they’ve heard of others’ successes in buying a second business that’s compatible with their first. While the advantages to this approach can be great, it’s important that you take the time to assess whether acquisition is a choice that aligns with your business’s needs—or your personal investment goals—and your ability to invest the time and resources that are required to succeed. This guide can help you firm your objectives:  Pre-acquisition Action Items: Steps You Must Take Before Buying a Business Buying a business is a complex process. One of the smartest moves you can make is to spend time studying what it means to buy a business, weighing the pros and cons of acquisition, and understanding the process you’ll take to find, vet, negotiate, and finance the purchase. Before buying a business, you should take […] www.owneractions.com
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2 | Underestimating the work that goes into buying a businessMany business owners find that it takes up to 12 months to source the right second business. Some search for two years or more. If you’re determined to buy a business, you should recognize that the process can be long and complicated. Plan to spend months reviewing business listings, signing non-disclosure agreements, and reviewing the financials and practices of multiple businesses before settling on a target and completing your acquisition. These two articles can help you set yourself up for success:  Preliminary Due Diligence: Evaluate a Business for Acquisition It can be exciting to find a small business that meets your criteria for acquisition. But before pressing forward with an offer, take some time to examine the business thoroughly so that you can make an informed decision about your purchase. There are quite a few steps you’ll need to take to evaluate a business […] www.owneractions.com  Assessing the Listing: What Buyers Should Look for in Every Business Posting Businesses listed on business brokerage sites often follow a specific format. It can be great to have this consistency—and benefit from the apples-to-apples comparisons brokers try to set up—but when you aren’t familiar with the terms, the listings can be overwhelming. In this article, you’ll learn how to evaluate a business by deciphering the terms they […] www.owneractions.com |
3 | Forgetting to think like a sellerBuyers can fair far better in negotiations by considering a seller’s needs and goals alongside their own. Put this concept to work in your negotiations by considering a seller’s attachment to his or her business and avoiding harsh criticisms and shows of disrespect when discussing the business’s drawbacks. You should also try to connect with the seller and build a positive working relationship that’ll serve you both well as you discuss confidential matters and negotiate terms. By establishing a good working dialogue, you may access better information, and you’ll be able to discuss the business’s blind spots and attempts to work around them. This guide can help you learn more about this part of the acquisition process:  Negotiate the Terms of an Acquisition Once you’ve found a business that meets your criteria and you’ve vetted it with your accountant and attorney, you can focus your efforts on developing your offer. Through this process, you’ll likely settle on a pitch that’s both idealistic and realistic, recognizing that many of the terms you ask for may receive pushback. How should […] www.owneractions.com |
4 | Accepting the success of a business at face valueIt’s a broker’s job to present a seller’s business in the best possible light. Here are two tactics many take to do this:
By working with an accountant, you’ll be able to spot these moves and discover irregular financial behaviors that may signal trouble in a seemingly good business. Learn how to find a great accountant with this guide:  Find an Accountant for Your Acquisition A knowledgeable business accountant is a must for any small business acquisition—and for all the work that follows. Here’s why: An accountant can help you make sense of your target company’s financials, tax returns, and valuations and spot the red flags you need to know before agreeing to a deal. An accountant can also help […] www.owneractions.com |
5 | Failing to assess the seller’s base of customersAs you may know, many small business owners cultivate sales among their personal base of contacts. While these sales are completely appropriate, you should be concerned if a business’s sales depend on the relationships that existed between the seller and the business’s customers—and further, that the customer base may disappear when the owner exits the business. Avoid this mistake by asking sellers to disclose the percentage of customers who have personal connections with them. Then, you should assess whether the customers who remain represent a large enough percentage of the business’s sales history to proceed with the transaction. Our article on due diligence can help you spot other red flags.  The Due Diligence Process for Business Acquisitions When you engage in the due diligence process, you’ll review the ins and outs of the business you intend to buy. You’ll gather the information you need to assess its financial strength, verify the owner’s claims, and ensure that you have a comprehensive understanding of the business’s current positioning. A good accountant and business attorney […] www.owneractions.com |
6 | Trusting the accuracy of the seller’s dataIn every transaction, a seller will present balance sheets, income statements, and other financial documents that demonstrate a business’s strength and hint at its future viability. These documents should never be accepted at face value. It’s imperative that you study and verify the business’ financials. Hire an accountant to assist in the assessment and ensure that there are no red flags, questionable line items, or evident problems in the business’s cash flow or performance. |
7 | Relying on numbers aloneSometimes, buyers complete their evaluations of a business without considering external factors, such as customer reviews, employee satisfaction, competitive positioning, environmental concerns, legal claims, and regulatory issues that can impact a business’s long-term success and sustainability. Be sure to conduct outside research, perhaps with the help of an attorney, to build a clear picture of the business before proceeding with your acquisition. Learn about why you should have an attorney on your team in our article:  Find an Attorney for Your Acquisition An attorney can be an invaluable member of your team, especially as you work through the complex parts of a business acquisition. When you’re first starting out, it can be tough to determine which kind of legal practice you need, and further, which attorney in that realm has the right sets of skills and experience […] www.owneractions.com |
8 | Missing the mark in valuationsBuyers tend to overestimate the value of businesses because they miscalculate the magnitude and frequency of future capital expenses. To avoid this mistake, you should account for both working capital needs and the costs that’ll be required to boost infrastructure, upgrade technologies, and maintain equipment. An accountant can help you with these projections. Learn more about valuations with this guide:  A Practical Guide to Evaluating the Price of a Business Two of the most difficult parts of buying a business are evaluating the asking price and proposing a fair offer. In this article, you learn: How sellers, brokers, and valuation specialists select an asking price The importance of that price for lending The methods you can take to determine a fair value The considerations you […] www.owneractions.com |
9 | Forgetting to set aside money for working capitalSome owners raise funds for acquisition without setting aside money to cover operational concerns and emerging needs. When this occurs, buyers create a scenario that may require them to take on more debt or put off improvements that are necessary for the success of their business. You can avoid this mistake in two ways. First, set up a contingency fund that equals approximately 10 percent of your business’s purchase price. And second, create a working capital account that can cover at least three months of expenses. Interested in ideas for raising capital? This guide will help you explore your options:  Your Go-to Guide to Financing Growth Through Acquisition The costs of buying a business can be substantial. Fortunately, there are lots of ways to amass the cash you need for your acquisition. In this article, you’ll learn how many business owners cover the costs of buying a business—and the operational costs that follow. Important note: These practices may be suitable for small business […] www.owneractions.com |
Many of these mistakes can be avoided by connecting with legal and accounting experts who are familiar with the small business acquisition process. If you’re ready to build your team, we can help you get started.
First, find an attorney who can help you through every step of the acquisition process. You can get started here:
You can also check out some of our favorite accounting firms here:
Reconciled
Your Business Deserves the Very Best
Reconciled is an award-winning organization and one of the fastest-growing accounting firms in the country. Their team of entrepreneurship gurus, e-commerce pros, and tech-loving cloud accounting specialists look at your business holistically and help you analyze your spending, measure costs, and find opportunities to enhance margin and profitability, along with taking on your day-to-day bookkeeping. Want to learn more? Click the connect button below for an introduction.
Xendoo
Be Tax Ready All Year Long
With Xendoo, you can access a dedicated team of expert CPAs and accountants who provide monthly bookkeeping, tax preparation and filing, and tax consulting, three services that will help you stay on top of all your financial needs. Their team can also help you with your personal tax returns, too. You can explore their plans with totally transparent pricing by following the link below, and for a limited time, you can try their online bookkeeping service free for one month. Restrictions may apply. See Xendoo’s site for details.
1-800Accountant
Say Hello to Better Online Accounting
Business owners love 1-800Accountant. Here’s why. First, the service pairs you with a CPA who is an expert in your state and industry and can answer the tough questions you have about your business. Second, while many others charge by the hour, or worse, by minute, 1-800Accountant sets you up with an affordable, flat-rate pricing plan so you always know what you’ll be paying. Follow this link to try 1-800Accountant for 30 days with a money-back guarantee.
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