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5 Mistakes to Avoid When Buying a Business

Buying Businesses September 3, 2016

It easy to fall into any number of pitfalls when you’re buying a business for the first time. After all, you’re ready to be your own boss and take charge of your destiny. You’re excited to build value from an established business that looks successful and has a great balance sheet.

As business brokers with extensive experience, we notice that there are five consistent errors buyers make.

Buying An Unsuitable Business

Falling in love with the product without fully appreciating the production is a common mistake many buyers make. Just because you love to eat doesn’t always mean you love cooking. Love cars? Doesn’t make you a mechanic, or even a chauffeur.

The skills you bring to a business are as important as the cultural fit. A hairdresser doesn’t always make the best salon owner if they’re not going to be actively involved in growing the business and can’t relate to the staff or clientele.

Finding the right kind of business in the right area is critical to the success of any new owner of an established business. Your skills, interests, and ability to connect with staff, customers and suppliers are critical to your success.

Misunderstanding the True Value

The assets of the business will be listed as tangible and intangible. Goodwill may form a significant value of the business. Buyers that don’t completely understand how the good will was established, evolved, and continues to exist miss an opportunity to capitalise on it.

Failing to Investigate

The balance sheet, business plan, and prospectus are critical to investigate in order to understand the value of the business. What many purchasers of an existing business fail to do is to scrutinise the market. Few spend time in the neighbourhood or learning about the geography, demographics and dynamics of the marketplace. A continental delicatessen in a suburb with a high influx of East Asian immigrants will need to innovate to maintain relevance. Similarly, a mechanic in an increasingly gentrified area may be priced out of the market with increased rents or developers knocking at the door.

Buyers who fail to understand the product within its context often fail to capitalise on a business.

Incorrect Financing

How a buyer finances the purchase of a new business can be the difference between success and failure. Going into debt to purchase a business can leave a new owner without a line of credit available to re-stock. Some buyers use a credit card debt, only to regret this option in the end.

By eliminating your own accountant from the process, buyers of an existing operation can neglect ways of maintaining cash flow and keeping the business afloat.

Buying the Current State

The ledger and prospectus should tell the story of how the business got to its current state. A good seller will also provide you with the reasons why, with a full account of investments in infrastructure and marketing. The seller may also have income and expenditure projections as well as growth strategies in the business plan.

Buyers often fail to think of how the business will operate in the future and what they’ll need to do to build and realise value.

Talk to a Broker with Business Experience

LJ Hooker Business Broking is Australian’s leading business broker, with clients that include Dominos, Snap Printing, Kwik Kopy, Dairy Farmers, Oporto and Michel’s Patisserie.

With follow-up sales support built into the only database designed for business broking in Australia, our bespoke services enable buyers, sellers, brokers and third parties to be fully compliant. For more on how to buy the right small business, explore our services or call 02 9552 1111.

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