1

Entering the process without a clear objective

Often, prospective buyers begin their search because they’ve heard of others’ successes in buying an established business. While there are clear advantages to this approach, it’s important that you take the time to assess whether buying a business makes sense with your goals and your ability to invest the time and resources you'll need to succeed.

This guide can help you firm your objectives:

Pre-acquisition Action Items

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 […]

2

Underestimating the work that goes into buying a business

Many buyers find that it takes up to 12 months to source the right business. Some search longer, 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 […]

A Step-by-Step Guide to Evaluate a Business Listing

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 […]

3

Forgetting to think like a seller

Buyers 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. Avoid 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. This could serve you both well as you discuss confidential matters and negotiate terms. By establishing a good working dialogue, you may access better information about the business. You might also open the door to discussing the business’s blind spots and ways to work around them.

This guide can help you learn more about this part of the acquisition process:

How to Negotiate to Buy a Business

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 […]

4

Accepting the success of a business at face value

It’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:

1. In some cases, they may make adjustments to the earnings and include add-backs to improve the financial picture of the business.
2. They may coach the seller through some pre-sale moves such as selling off excess inventory or temporarily slashing prices to boost the attractiveness of their business.

By working with an accountant, you’ll be able to spot these moves and other irregular financial behaviors that may signal trouble in a seemingly good business.

Learn how to find a great accountant with this guide:

The Right 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 […]

5

Failing to assess the seller's base of customers

Many small business owners turn their personal contacts into clients. You should be concerned if a business’s sales depend on relationships that exist between the seller and the business’s customers. Here's why: that 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, assess whether the customers who remain generate enough sales volume to proceed with the transaction.

Our article on due diligence can help you spot other red flags.

Due Diligence for Buying a Business

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 fully understand the business’s current positioning. A good accountant and business attorney are essential for the due diligence […]

6

Trusting the accuracy of the seller's data

In every transaction, a seller will present balance sheets, income statements, and other financial documents that demonstrate a business’s strength and viability. Of course, these documents should never be accepted at face value. You'll need to 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 alone

Sometimes, buyers complete their evaluations of a business without considering external factors. Here's why they should. Customer reviews, employee satisfaction, competitive positioning, environmental concerns, legal claims, and regulatory issues can impact a business’s long-term success and sustainability.

Be sure to conduct outside research, too, to build a clear picture of the business before proceeding with your purchase. An attorney may be able to help.

Learn about why you should have an attorney on your team with this article:

The Right 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. However, it can be challenging to determine which kind of legal practice you need, and further, which attorney in that realm has the right sets of skills and experience to support you through […]

8

Missing the mark in valuations

Buyers tend to overestimate the value of businesses. Many miscalculate the magnitude and frequency of future capital expenses. Avoid this mistake by accounting for the business's working capital needs and the investments you'll need to boost infrastructure, upgrade technologies, and maintain equipment. An accountant can help you with these projections.

You can learn more about valuations in this guide:

Evaluate the Asking Price of a Business

One of the most difficult parts of buying a business is learning to evaluate the asking price and proposing a fair offer. In this article, you'll 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 […]

9

Forgetting to set aside money for working capital

Some buyers raise funds for acquisition without setting aside money to cover operational concerns and emerging needs. Often, these buyers must take on more debt or put off improvements the business needs to succeed.

Here are two ways to avoid this mistake. First, set up a contingency fund that equals approximately 10 percent of the purchase price of your business. 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 for Financing an Acquisition

The costs of buying a business can be substantial, but there are many ways to acquire the money you need for your acquisition. In this article, you’ll learn methods for financing an acquisition and the operational costs that follow. Important note: These practices may be suitable for small business buyers who are purchasing an entity […]