Many entrepreneurs are turning away from the risky process of starting their own businesses. Instead, they’re choosing to buy established companies to secure their investments. A total of 8,647 business sales were closed in 2021, nearly one thousand more than from the year before.
If you’re interested in buying an existing business, you’re in luck. On average, it’s a lot safer than startups and you might start earning right away, but only if you do your diligence. Let’s talk about some of the most common mistakes to avoid when buying a business!
Buying vs. Starting a Business
Starting a business is easier than buying a business in the legal sense but in no other sense. Believe it or not, 90% of startups fail within the first few years of operation, so it is undoubtedly safer to buy an established business than to build one from scratch. There are simply too many hurdles to clear for new businesses, and any one of them could be its downfall.
In theory, all you have to do to start a business is apply for licensure if applicable and register your business name with the state. However, any business owner knows there’s a lot more to it than that. That’s why many entrepreneurs and investors prefer new businesses with established customer bases, vendors, employees, and processes.
If you have a unique business idea that hasn’t been tried before or that’s lacking in your area (with enough demand), then it may make sense to start your own business. Otherwise, it’s a lot safer to buy a business with existing revenue. You just need to know what mistakes to avoid.
4 Common Mistakes When Buying a Business
If you’re interested in purchasing an established business, it’s important to learn from the mistakes of other like-minded entrepreneurs. Here are four of the most common mistakes to avoid when buying a business.
1. Not Having a Clear Vision
Wandering aimlessly through business listings until you find something that looks good is not the way to make such an important decision. Which business you buy is likely the biggest financial decision you’ll ever make, so it’s important to get it right.
Moreover, it’s better to wait for the right business than to rush into something that seems “adequate”. For example, if you have experience (especially management experience) in a particular industry, then you may want to consider waiting for something in that field. Also, what type of business structure fits your needs (sole proprietorship, LLC, etc.)?
Of course, these are obvious examples. You may also want to find something that’s in the right location, for the right price, that’s currently profitable, or that is in need of something you can offer. These are more specific to your personal needs and goals, but you should keep them in mind.
Ideally, you should have clear, written ideas and goals for the type of business venture you want to pursue, and you should stick to them as closely as possible. You can’t control what businesses have already done, but you can wait to find a business you can work with!
Before you even begin your search, you need to know the type of business you’re looking for, including:
- Business structure
- Employment type
- Profitability (or established revenue)
- Public relations or branding issues
- Legal issues
Also, it’s important to know the price range you can afford. Remember, the price of the business isn’t the only factor. Depending on the type of business and its profitability, you may need anywhere from an additional 10% to 100% of the purchase price on hand.
2. Failing to Secure Enough Capital
It’s no secret that running a business is expensive, so it’s important to plan ahead for unexpected expenses. If you’re expecting to spend all of your money on buying the business and for the existing revenue to cover the rest, then you’re setting yourself up for failure.
You don’t need to spend an extra ten years saving up. In most cases, you can get the funding you need through loans, investments, crowdsourcing, and other means. If your budget is particularly tight, ensure that you at least have open lines of credit available to you as a last resort.
Remember, credit cards come with higher interest rates than business loans on average, so try to limit your dependence on them as much as possible. Also, you may want to consider your current credit rating, especially for a sole proprietorship (which accounts for 73% of all businesses). Improving your credit rating could help you save a lot of money and secure loans more easily.
3. Not Understanding Business Laws
Buying an existing business comes with some legal hurdles that can be difficult to navigate on your own. Also, without the right help, you may find yourself at a disadvantage when it comes to negotiations and the transfer. This could end up costing you a lot more in upfront expenses.
Generally speaking, we’d suggest speaking to an experienced small business acquisition lawyer in your area for more information. They can help you get the best deal, comply with existing laws in your area, and plan for a successful and legal transition.
4. Ignoring Due Diligence
You wouldn’t buy a home without an inspection or a little research on the neighborhood, would you? Well, the same logic applies to buying a business.
There is plenty of due diligence before making such an important decision. The more prepared you are, the better. At the very least, this should include:
- Industry research (online research, consulting, legal help, etc.)
- Developing a marketing strategy
- Understanding current policies (employee, customer, financial, etc.)
- Listing new policies or approaches to existing processes
- Researching the business specifically
- Learning about existing customers
- Financial planning (six-month budget, etc.)
Also, this is another instance where a business lawyer can help you. Accountants and attorneys know what to look for in terms of financial or legal issues, which can help you make an informed decision on your purchase and avoid any issues with the transition.
5. Not Knowing Where to Look
There are plenty of places to find businesses for sale, but you aren’t going to go around town looking at signs on doors, are you? While there are several online platforms that list business sales, not every business owner will list on every site. For this reason, we recommend looking at a few different sites that operate in your area and consulting with a business attorney for more information on them.
6. Not Asking Questions
When reaching out to sellers, try to meet face to face if possible and let them know what questions you’ll have in advance so they can prepare. Calling them out of the blue and asking for financial reports from the last ten years might not yield immediate results. Instead, set up a meeting with your business counsel and ask for the information you want to know about.
Of course, financial statements and the overall history of the company are important, but you can also ask more specific or subjective questions. For example:
- What are some challenges you’ve faced with this business?
- How did your company handle the last recession?
- Do you know your client retention rate?
The list goes on, but you can ask whatever you need to know. This is an important part of due diligence, as there is some information you can’t receive from public records or business listings.
Finding the Right Legal Help
Finally, it’s essential to have an experienced lawyer for small business acquisitions. There is no substitute for expert legal help during such an important time. This simple step could take a lot of work off of your plate and secure your investment for the long term, so spare no expense!
When searching for the right lawyer or legal team, follow some of the advice above! For example, ask questions about their past experience and look into their record. Due diligence can go a long way to getting you the legal help you need for a smooth business acquisition.
Now that you know how to avoid some of the most common mistakes when buying a business, you can have a much safer and smoother acquisition. There’s no such thing as “risk-free” in the business world, but you can always minimize your risks with the right diligence and legal help!
Stay up to date with our latest news in business law and feel free to contact a business attorney in Savannah for help with your acquisition!