7 Common Mistakes to Avoid When Buying a Business

Owning a business is a dream for many. And by purchasing one that’s already up and running, you avoid the headaches, stress, and risk of starting one from scratch. It’s sort of like adopting a teenager instead of a newborn. You already have a pretty good idea of what you’re getting into. 

But like teenagers, there’s an element of the unexpected and still plenty of mistakes you can make. To help you navigate this new territory, here are 7 Common Mistakes to Avoid When Buying a Business.

Mistake #1: Not understanding why the business is for sale. 

Seller motivation is always one of the first things you should look into. There are plenty of legit reasons why someone would want to sell their business. They might be planning a cross-country move, want to explore a new industry, or are simply ready to retire. It could also be because it’s hemorrhaging money, they’re having trouble retaining employees, the production costs are too high, and so on. You might not discover their true motives until you enter the due diligence stage, but from the very start, keep your antenna up and stay alert. 

Mistake #2: Not doing due diligence. 

Listen, nobody likes doing homework. It was the least fun part of school. But you did it because otherwise, you’d flunk out, be held back a grade, or be grounded from attending the Big High School Dance. Due diligence is like homework for adults. You must, must, must (did we mention must) understand the nature of the deal and the nature of the business you want to acquire. This is not a part to be skipped or rushed. Don’t take what the seller is telling you at face value. You need to conduct your own investigation into their financials, tax returns, properties, inventory, contracts, etc. It will all become yours when you sign on that dotted line, so you sure as hell want to know what you’re getting into. 

Mistake #3: Not having enough cash flow to operate.

No matter how good of a deal you score, you still need to make sure you have adequate cash to keep the ship afloat. There’s always a transition period when buying a business, and you might incur unexpected costs, lose loyal customers, or discover their financials aren’t quite what you thought (again, this is why you must do due diligence). These can all be a serious blow to your cash flow, so plan to prepare for the unavoidable “growing pains” stage.

Mistake #4: Paying based on forecasted projections.

You should always pay based on the current value of the business, not the potential of the business. Some sellers might try to spin you a fairytale of the riches and wonders just waiting to be unlocked in the future - and use that as a bargaining chip to charge an inflated price. If business booms once you take over, it will be because of your time, energy, and hard work. YOU should be the only one who benefits. 

Mistake #5: Being desperate for the deal.

You know that phrase, “desperate times call for desperate measures?” Unless a loved one is being held hostage or the alternative is a lifetime of watching Oakland A’s games, you should never go into a business purchase out of desperation. You might want this business more than you’ve wanted anything in your entire life. Still, if that clouds your judgment and prevents you from conducting proper due diligence, securing adequate funding, or crossing all the t’s and dotting all the i’s, we have a hunch it isn’t going to end well. (Maybe watching those A’s games isn’t the worst thing in the world.)

Mistake #6: Rushing the Process.

We went over this in-depth in a previous post, but as a reminder, there’s no one-size-fits-all timeline. It should take as long as it takes. Temper your expectations and give the process the time it deserves to be done properly, otherwise, you’re doing yourself a great disservice. As one of our Founding Fathers said, “Great haste makes great waste.”

Mistake #7: Making Too Many Changes Too Fast

In your zealousness and excitement of being The New Guy In Charge, it’s tempting to start initiating sweeping changes on Day 1. Ideally, the business you buy is operating on a profit - so clearly, they’re doing something right. There will be opportunities for improvement, but you need to approach them diplomatically. Otherwise, you run the risk of alienating and losing good employees and customers. 

We hope you don’t make these seven mistakes, but remember, it’s all part of the learning process. It’s unlikely you’ll close on a deal without any sort of mishap or hiccup. Don’t let it discourage you or keep you from pursuing your dream of business ownership. Take the lesson, learn from it, and apply it the next time.