December 8, 2022
Top 5 Mistakes of Buyers
By Marc Gudowitz
Buying a small business can be a great way to grow your current business or venture into a new one. Buying a business, however, is very different than running a business, and business owners need to be aware of how complicated this process can be. There are many obstacles that will need to be properly navigated in order to assure a successful outcome for the buyer. The following are five of the top mistakes that small business buyers tend to make.
- Not Seeking Professional Help – Successful business owners usually have a team of professionals they depend on when needed. Normally, CPAs and lawyers are key members of this team and help guide the business owner with critical decisions. This should be the case when buying a business as well. You should make sure that your lawyer is a transactional attorney experienced in business acquisitions. If not, find one that is. Additionally, a qualified M&A Advisor should be added to your team. She/he will help guide you through the unknowns that you will undoubtedly encounter as you try to make your acquisition. Many buyers may be tempted to embark on this process on their own in order to save some money. However, this decision could wind up costing them a lot more than they saved and potentially even the deal. Buying a business is not a Do-It-Yourself project. Have the right team around you to assure success.
- Not Knowing the Process – You have now made the strategic decision that you would like to buy a company. Now what? What is the next step? What kind of company should I look for? Where should you look? What can you afford? Should you get prequalified for a loan? How long should this process take? Should I buy the business personally? The answers will vary based on your individual circumstance, however, all these questions need to be addressed and defined at the very beginning of your process. Without doing so, you run the real risk of spinning your wheels, wasting significant time and effort with a deal that may never work, all while possibly missing out on the opportunity that could have been perfect for you. Your professional team will help guide and educate you in this area.
- Not Knowing What You are Looking For – Equally as important as knowing the process is knowing what you are looking for. The more specific you can be, the greater the chance you will have to find the opportunity that is right for you. Define the industry. Define the subset of the industry if there is one. Define the ideal size for your ideal business (revenue, number of employees). Define the location if that is relevant. If it isn’t relevant, define that as well. The more details, the more specifics, the better. Understand that your perfect business may or may not currently be on the market for sale. You need to know what you are looking for in order to find it.
- Due Diligence Negligence – There is nothing more important than rolling up your sleeves and diving deep into the details of the company that you’re looking to buy. Financial statements and tax returns give some information, but they certainly don’t tell the entire story. You, the buyer, need to make sure that you see the entire story before you buy it. You need to know what information to ask for and what questions to ask. Your biggest challenge here is that you don’t know what you don’t know. Rely on your professional team to guide you through this process. Thoroughly review the information that you have been given to make sure all initial representations are supported. If there are any questions in your mind, double check and don’t be shy about asking the seller(s) to address your concerns. Any seller negotiating in good faith will be happy to clarify what you need clarified. With all that said, the due diligence period should not drag on indefinitely as there should be target completion dates in the Offer to Purchase (OTP) agreement. Because of this, it is essential that you are well prepared with what you want to review once the OTP is executed. Again, your professional team, notably your M&A Advisor will assist you in this area.
- Inadequate Transition Planning – The post-closing transition period will be one of the most important time periods for the new owner as you take the reins of your newly purchased business. It can also be one of the most challenging times as well. As the new owner, it is critical to properly plan for the transition period. This means both financially and organizationally. Financially, you need to make sure that you have enough working capital to keep the operations going. This may seem elementary, but it is quite common to underestimate how much working capital you will need causing a severe strain on cash flow for the new owner. New buyers should always over-estimate the capital needed for normal operations when taking the reins of their new company and always have an emergency reserve accessible.
From an organizational standpoint, you as the new business owner should resist the impulse to make changes too quickly. It is important to get a true feel for the work flow, employees and culture before making any major changes. Many new owners make these changes too quickly and wind up regretting these moves.
Buying a business can be a deeply rewarding endeavor if executed correctly. If not, it could be a nightmare and a cause for regret for a long, long time. If you surround yourself with a qualified professional team and properly prepare from the start of the process, you can certainly tilt the scale to assure the former scenario and avoid the mistakes described above.
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About A Neumann & Associates, LLC
A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process for the past 20 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed thousands of business valuations and deal closings in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732.872.6777 or Info@NeumannAssociates.com
About A Neumann & Associates, LLC
A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or email@example.com