When you want to buy an existing small business, it’s either your first operation or another one added to your portfolio.
Either way, you’re curious about what can go wrong – beyond just overpaying. What are the biggest mistakes that buyers make when purchasing a business?
At CSI Accounting & Payroll, we’ve worked with small business operations for over 50 years. That means we’ve heard about a variety of mistakes that are made when buying a business, including these five most common ones:
- Not understanding the industry.
- Not doing due diligence.
- Falling in love too early.
- Not having enough liquidity.
- Not seeking professional advice.
1.) Not Understanding the Industry
This is by far the biggest mistake that we see potential buyers make.
Many people will research which type of business can make the most money in their area, but they don’t fully understand what it takes to run a business in that industry.
Different industries will have different requirements and challenges that you’ll need to be prepared for immediately. Do you have the licensing you need? Do you know what your target audience is? Do you know how to reach them quickly?
2.) Not Doing Due Diligence
The second biggest mistake that we see people make is not doing their due diligence before committing to a purchase.
What does that mean? They don’t do their research ahead of time. When buying a business, you need to get details from the internet, the owner, and the local community.
How profitable is the business? Does it have any pending lawsuits? What is its reputation like? Can the information be backed up with financial statements and reviews?
3.) Falling in Love Too Early
This can happen much faster than you think. If you form a personal attachment to a specific business, it can be dangerous.
How so? Falling in love with a business too early can have a variety of results. The best case is that you overpay for a good business. The worst case is that you commit to a business that will run you into the ground.
Ultimately, until you have all of the information needed to make a good purchase, you must be able to know when to walk away.
4.) Not Having Enough Liquidity
Financing a business is the first financial concern you should have, but what about funding it once you complete the purchase?
Once you buy a business, you’ll still need the liquidity to at least pay yourself and your employees (as those are the largest expenses that most businesses have). You need to be able to function until revenue starts coming in steadily, otherwise it will create a cash flow issue.
5.) Not Seeking Professional Advice
The final big mistake that we see potential buyers make is trying to handle the purchase without a small team of experts to guide the sale.
How should you structure the sale? How should you structure the loan? Do you know what the sale really entails – like the difference between a stock sale and an asset sale?
At the very least, you should want an attorney and an accountant on your team to make sure you’re getting the best deal possible. Here’s how an accountant can help!
Avoid Common Mistakes When Buying!
Now that you know about the five biggest mistakes we see when buyers try to purchase businesses, are you ready to check out monthly accounting services to avoid them?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what it’s like to work with CSI by clicking the image below:
