A Buyer’s Top Five Mistakes When Buying a Business

Over the years, we have seen certain buy-side mistakes that recur again and again. Here is a list of some of the more common problems seen over the years.

#1 – Insufficient Information Verification
Important information about the business should be verified, in particular as it relates to trend lines. How have customer relationships developed? Structural changes? Are there any supply constraints – now or predicted? How difficult is it to attract future talent? Is the company dependent on key employees?

Some of the investigation can be done by the principal to save money, but this is not the place to cut corners, as it may cost a lot of money in the long run. For example, prior to an acquisition, a CPA can review the key financial information like payables, receivables and inventory. The attorney can review leases and contracts, and a business valuation professional can appraise the competitive landscape, the economic conditions, and help establish a Fair Market Value for the business (if such had not been done before). An independent appraiser can value any real estate and equipment.

#2 – Overpaying or Paying For Potential
At times, some new business owners position themselves into challenging positions by overpaying – triggering too large of an acquisition debt load on the business with too little cash flow and reduced borrowing capability for future investments / expansions.  

This is particularly true, if the new owner pays for the ‘potential’ of a business. The ‘value’ of the business should be determined primarily on the basis of its current condition, not what it could be yielding at some day in the future.  Simply speaking, often it will take time and money to develop its future (additional) potential, and if the new owner undertakes these risks and efforts, then he/she should deserve to be paid for them.

#3 – Letting Emotions Rule
Having dreamt of owning a business, one can easily get caught up in strong emotions in seeing such dreams come true. However, often these dreams fail. For example, the reason many restaurants end with a high failure rate is that the owner starts them because he/she likes cooking. The truth, however, is that few truly successful restaurant operators cook, rather, time is spent on ordering supplies, managing staff, handling administrative tasks, and resolving day-to-day issues.

To counteract one’s emotions, the advice and input of an objective, external advisor might be the best advice ever received.

#4 – Poor Self-Evaluation
Owning a mid-sized business takes many talents, and to be successful, the new owner needs to have most (if not all) of these qualities in place – in other words, the new owner should match his/her strengths to the key duties required in the new business.

Having said so, nobody can be good at all of them; thus, provisions need to be made for areas in which the new business owner is weak. For example, tasks like accounting or payroll can be subcontracted.

At minimum, the help of an attorney and CPA should be recruited for the ongoing business. Many buyers also consult business coaches. The attorney can make you aware of legal and liability issues with the business, whereas the CPA can support with a continued financial analysis and advise respective taxation matters. In sum, a good self-evaluation is needed to give the business its best chances to grow.

#5 – Making Too Many Changes, Too Fast
New business owners are often tempted to immediately implement wholesale changes to the newly acquired business – often destroying goodwill they just paid for.

Unless the business is a ‘turn-around’ situation in bad financial condition, a smarter way is to spend some considerable time to understand the business first, its employees, and its customers before executing changes – also a perfect time to solicit suggestions from stakeholders. After all, the business has been profitable in the past because ‘something was done right’!

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[The blog contains excerpts out of the recently published book “ The Road Beyond – What Nobody Tells You About Selling a Midsized Business by Achim Neumann]