Buying a Business: A Buyer’s Top 5 Mistakes

Over the years, we have seen business people hoping to buy a company make the same mistakes over and over again. Here is a list of some of the most common errors we’ve seen over the years.

Insufficient information verification. Important information about the business should be verified, in particular as it relates to trend lines. How have customer relationships developed? What structural changes have there been? Are there any supply constraints — now or predicted to occur in the future? How difficult is it to attract future talent? Is the company dependent on key employees? To save money, the principal can do some of the investigation, 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 such key financial information as payables, receivables and inventory, an attorney can review leases and contracts, and a business valuation professional can appraise the competitive landscape, the economic conditions the company faces, and help establish a fair market value for the business (if such has not been done before). An independent appraiser can place a value on any real estate and equipment.

Overpaying or paying for potential. At times, some new business owners overpay, taking on too large an acquisition debt load. The result is a business with too little cash flow and a reduced capacity to borrow for future investments/expansions. This is particularly true if the new owner pays for the “potential” of a business. The “value” of a business should be determined primarily on the basis of its current condition, not what it could be yielding some day in the future. Often it will take time and money to develop its potential in the future, and if the new owner on these risks, then he/she deserves to be paid for them.

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, they spend their time ordering supplies, managing staff, handling administrative tasks and resolving day-to-day issues. To counteract one’s emotions, seeking the advice and input of an objective, external adviser might best.

Poor self-evaluation. Running a midsize business successfully takes many talents, and the new owner needs to have most, if not all, of these qualities in place beforehand. In other words, the new owner should match his/her strengths to the key duties required in the new business. 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 a 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 the owner with a continual financial analysis and advise on respective taxation matters. In sum, a good self-evaluation is needed to give the business its best chances to grow.

Making too many changes to fast. New business owners are often tempted to immediately implement wholesale changes to the newly acquired business, often destroying the goodwill they just paid for. Unless the business is in bad financial condition and needs to be turned around quickly, a smarter move is to first spend some considerable time understanding the business, its employees and its customers before executing changes. It’s also a perfect time to solicit suggestions from stakeholders. After all, the business was profitable in the past because “something was done right.”

(Article written by Achim Neumann)

(Achim Neumann is the president of A Neumann & Associates LLC, a mergers and acquisitions and business brokerage firm. The above is excerpted from his book “The Road Beyond: What Nobody Tells You About Selling a Midsized Business.)