The Top 6 Mistakes When Buying a Business

Buying a business can be the greatest wealth building tool available to an entrepreneur, however few schools teach this process. Entrepreneurs such as T. Boone Pickens, Carl Icahn, and Carlos Slim have used acquisitions and mergers to obtain vast amounts of wealth. For most beginning entrepreneurs the concept of buying a business is difficult at best. Here are the top 5 mistakes that new business buyers make:

1. Sufficient planning – Most entrepreneurs think that business plans only apply to start ups. Can you imagine not having a business plan before buying a business? Banks won’t finance you, investors won’t invest with you, and most of all – if you don’t know where your business is heading how will any of your staff know? Buying a business means you get business processes, clients, and assets. It doesn’t mean that you can be a poor manager. Poor planning kills business acquisitions – period!

2. Adequate capitalization – Are you (and your partners) prepared to go without an income from this business for the next 6 months? Are there outstanding payables the business needs to settle after closing? What about the unexpected? If you want to make the business better – you need to drive sales. Greater sales mean greater cost of doing business.

3. Insufficient partner “understanding” – Who will and has contributed capital? What return do they get? Does the business need to provide a full time income for multiple partners? What happens if the business doesn’t make enough money to support payroll? Insufficient partner understanding kills businesses frequently.

4. Due Diligence- The seller says they paid for bills but the creditor says they’ve never received the checks – this happens all too frequently and one small mistake can create disaster after the purchase.

5. Not having a mentor- Frequently new business owners have big egos that go unchecked. It is important to have a mentor to help you through the due diligence, acquisition, and the first year of buying your business. A business broker is there to help you with negotiating the purchase. Brokers are paid whether or not you succeed in your new business. A mentor should be personally invested in your success and help you with the fundamentals of the acquisition.

6. Sales Forecasting – This is an item that kills several new business owners! After the acquisition you need to plan on a decrease in sales not an increase! I’ve made this mistake just like everyone else who has ever bought a business. After the acquisition you need to expect sales will decrease, slightly and temporarily, because you will be establishing relationships with vendors, customers, and transitioning with the previous owners. Even if you are merging existing businesses you need to plan on a little transition time. A dangerous mistake first time business buyers make is to pay for the acquisition from a new increase in sales.