The Top 5 Mistakes People Make When They Want to Buy a Small Business
Buying a small business can be an extremely exciting endeavor, and an extremely profitable one, too. Buying a small business can be a life-changing experience, both for you and for the people who you will employ.
There are many advantages to purchasing an existing small business over starting one from scratch. Most small businesses fail within the first few years of operation. Being able to purchase one that has already overcome that hurdle and survived removes a lot of risk from your shoulders.
You may have already settled on the industry in which you want to buy a small business. You may already have one or two specific businesses in mind. But, are you completely prepared for the in-depth process of researching, negotiating and closing a deal?
Running a small business is one thing. Purchasing one is something entirely different.
Here are the top five mistakes people make when they want to buy a small business. Use this as a guide to help you better prepare for the road ahead.
1. They Think They Can Find a Profitable Business Fast
Finding a small business for sale that’s in your desired industry and location is hard enough as it is. Finding one that’s profitable — or that provides a genuine path to profitability — is something else altogether.
People who want to buy a small business often think they’ll be able to do so fast. They don’t go into the process understanding that it can easily take a year or two to find the perfect fit and close a deal. Because of this, they sometimes make hasty decisions as they get lost patience.
It’s important to understand that finding the right small business to purchase takes time. Prepare yourself for a long game here, and you’ll more easily be able to avoid hasty decisions.
2. They Don’t Understand Why the Owner is Selling
Every owner has a story to tell. Sometimes, the owner is open to telling that story, and sometimes, that story is heartwarming. It could be that the owner has run the business for 30 years and is ready to retire to spend more time with their grandchildren.
Other times, though, the owner isn’t as forthcoming as to the reason why they’re selling. This should be a red flag if you’re considering buying that business.
You may not think the reason the owner is selling is a big deal, but it is. If you’re going to make a significant investment in purchasing a business, you should know what you’re getting yourself into.
Owners sell their businesses for a number of reasons. A few that could cause alarm include:
- Employees don’t like working there.
- A new competitor is coming into town or taking lots of business.
- They’re losing their top clients/customers.
- The business has a lot of debt.
You’ll be able to uncover some of these potential issues by reviewing the business’ books. Others you’ll have to dive a little deeper to discover.
3. They Don’t Understand What Drives the Business’ Profits
Analyzing the company’s financials is an important step of due diligence. During this phase of the business deal, you’ll be able to review and break down many of the company’s financial statements.
From these, you’ll be able to view things such as revenue, costs and profit. What may not jump off those pages, though, is what is driving the company’s profits. In other words, what one thing (or things) has resulted in the company producing profits in the past?
Most importantly, what one thing (or things) do you have to continue doing to remain profitable … or change to become more profitable? You must understand the driver behind the profits to be able to affect positive change.
4. They Only Use Numbers for Due Diligence
It’s easy to bogged down by numbers during the due diligence phase. There are going to be a lot of numbers in a lot of reports thrown your way. And while it’s great to review the data and gain some understanding from it, it’s important not to focus only on numbers.
You should do your due diligence on the business in other ways. You should experience what the company’s customers experience when they interact with the company.
If it’s a retail store, are the customers greeted by a friendly face when they walk in? Are the staff members helpful? Is the story easy to navigate? Are products highlighted appropriately?
You can conduct this research by walking into the store yourself, or having friends or family members to serve as “secret shoppers.” You can do this same process even if it’s not a retail store, too.
The customer experience is extremely important to a company’s success today. Without a good CX, a company isn’t likely to succeed over the long term. And, CX isn’t something you’ll be able to discover through numbers.
5. They Pay Too Much for the Business
Ultimately, a business will only be good for you to purchase if the deal comes with the right potential — and at the right price. Overpaying for a business can be extremely detrimental. It can get you started off on the wrong foot, limit your ability to fund necessary upfront investments and put you behind the eight ball before you’ve even started.
Oftentimes, people will fall in love with a business’ potential. That’s OK. It’s great to be passionate about an industry and bull-headed about the prospects of a small business in it. But, don’t let that cloud your judgment. You still need to purchase the business for a reasonable price, and “sell” the owner on why your number is fair and reasonable.
Don’t waste another day and talk to a Sunbelt South Florida broker today!
Sunbelt Business Brokers of West Palm Beach provides dedicated business brokerage services for all of your selling needs. Whether you are an established business owner nearing retirement and looking to sell, or an ambitious entrepreneur seeking your next investment opportunity, there is no reason to look beyond Sunbelt Business Brokers. Visit us at 800 Village Square Crossing
Suite 216 Palm Beach Gardens, FL 33410 or contact us at (561) 832-9222.