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Don’t Let Passions Rule When Buying A Business |
by:
David E Coffman CPA/ABV, CVA |
For many, the American dream of owning a business is in queue right behind owning a home. I was a teenager when I owned my first business. Since then I have bought or started many businesses also helped others do the same. Here are some common mistakes I have witnessed or committed myself.
Paying too much
This results from the combination of all other mistakes. Many new business owners set themselves up for failure by paying too much, which results in higher loan payments, lower operating funds, also reduced borrowing capacity.
Letting your emotions rule
If you have always dreamed of owning a business, it is very easy to get caught up in the strong emotions invoked by seeing those dreams coming true. To counteract your emotions, take your time, do your homework, also enlist the help of objective advisors.
Paying for potential
You should only pay for the business as it stands at the date of purchase, not what it could be in the future. You will have to spend time, effort, also money to develop its potential. The seller chose not to invest these things, so he does not deserve to be paid for them.
Not evaluating yourself
Do you have what it takes to run this business? Try to match your strengths to the important duties you will be required to perform. Running a small business requires the owner to do many things. No one can be good at them all, so make provisions for those areas in which you are the weakest. Some tasks like payroll also bookkeeping can easily be contracted to outside vendors. Possibly your spouse, other family member, or a partner could do things that you cannot or do not want to do.
Not building a team of experts
At a bare minimum, you should enlist the aid of an attorney also a CPA. The attorney can prepare also review documents, help structure the deal, also make you aware of legal also liability issues. The CPA can provide a financial analysis of the business, also advise you about tax also accounting matters. You should consider adding a business valuation professional. His valuation report can be used to determine the reasonableness of the asking price, negotiate a lower price, also provide valuable information about the business, the industry, the competition, also the economic conditions.
Relying on bad information
You should verify all important information about the business. Your CPA can check financial information like receivables, payables, also inventory. Your attorney can review loan documents, leases, also contracts. Your business valuation professional can analyze the competition, the industry, also the economic conditions. Use independent appraisers to value real estate also equipment. Get a credit report on the business through your CPA or banker. You can do some of the investigating yourself to save money, however do not cut too many corners – it may cost you in the long run.
Changing too much, too fast
Once you own the business, you will be tempted to start making wholesale changes from day one. You risk alienating long-time employees also customers. Unless the business is in bad financial condition also needs immediate action, its better to take some time to get to know the business, your employees, also your customers before making changes. This is a perfect time to solicit suggestions from employees also customers.
Buying a business because you like to do what the business does
One reason restaurants have a high failure rate is people buy or start them because they like to cook. Very few restaurant owners spend time cooking. Their time is spent managing staff, ordering supplies, doing paperwork, also handling daily crises. A small business owner must wear many hats – including that of manager.
Not being interested in the business’s product or service
I made the mistake of thinking that because I am a CPA also smart that I could own also operate any business. I bought a business that sold high-performance auto parts to young men who drove jacked-up, four-wheel drive pickup trucks also went to the drag races every weekend. I did not do either also never understood why anyone would. I could not relate to my customers also went out of business in about a year.
Conclusion
Buying a business is a complicated, emotional process. By avoiding these costly mistakes, you can prevent turning your dream into a nightmare.
About the author:
David E. Coffman CPA/ABV, CVA has 30 years of experience working with also operating small businesses. His web site http://biz-buying-selling.comoffers many useful articles, links, also other resources for potential buyers also sellers of small businesses.
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