Mistakes People Make When They Buy a Business
Posted by Bridge Business Brokers on 31st Mar 2023
Buying a business is one of the most challenging aspects of becoming an entrepreneur. Yet many people underestimate how complex and time-consuming the process can be. Working with a business broker can help you navigate each step, from locating a business to making an offer and closing the deal.
Along the way, a broker can also help you avoid these common mistakes people make when pursuing their entrepreneurial dream. Call us today for a consultation!
Miscalculating How Long It Takes to Buy a Business
Finding the right business to buy can be a full-time job in itself. Though you might get lucky and find something right away, the process typically takes anywhere from 12 to 24 months. Unfortunately, when the search begins to turn into an emotional rollercoaster, many people give up. Why?
- They didn’t ask themselves if they were truly ready to buy a business.
- They weren’t prepared for the financial risk involved.
- They didn’t devote enough time to the search due to their current job.
There’s a risk, too, of becoming impatient and frustrated when the process stretches into many months, and that can result in settling for a business that doesn’t meet your dreams or needs.
Not Understanding a Seller’s Reasons for Selling
Many business sellers want to retire or try a new venture. Others say they’re the reasons because they don’t want to reveal things like overwhelming competition, product obsolescence, workforce issues, or even threatened litigation. On the flip side, the seller might have a strong emotional tie to the business they’ve built and might be concerned that it won’t survive under new ownership. Asking the right questions before you buy a business will help you understand the seller’s motivation and reveal any potential blind spots.
Not Knowing What Drives the Business’s Profits
Every business seller will put their business and its profits in the best possible light. While you hope the business does indeed generate substantial revenue, it pays to be skeptical if:
- Profit margins are higher than the industry average.
- Revenue has increased significantly over recent months.
A deep dive into the business’s financials will help you understand the true picture.
Doing All Your Due Diligence Online
Due diligence is the process of verifying the seller’s representations about the business. Sadly, financial statements and tax returns can be manipulated, and there could be outstanding judgments, customer complaints, and other factors the seller “forgets” to disclose.
Today, you can learn a lot about a business from its website and social media accounts but remember that you only see what the seller wants you to see. In-person visits can help you gauge the business’s image in the community, the quality of its staff and inventory, and the level and positioning of inventory.
Overestimating the Value (or Potential Value) of the Business
Business valuation is an art, and sellers are often unrealistic when setting their asking price. A broker can accurately estimate a business’s worth and calculate its fair market value, so you feel confident in the investment you’re about to make. And once you find a business to buy, a broker’s experience provides invaluable counsel as you go through the process.
Before You Buy a Business
All of these tasks to take care of before you buy a business can be daunting to complete on your own. Working with a business broker lightens your load, as they do the heavy lifting for you. Have more questions? Contact Bridge Business Brokers today to learn more.