Avoid the Four Biggest Mistakes Business Buyers Make
Avoid the Four Biggest Mistakes Business Buyers Make
I have been helping people to buy businesses for nearly two decades. Over this time I’ve helped hundreds of people, and seen many successful business sales take place. I’ve also seen a number of people make mistakes, so I am well placed to offer advice on how you can avoid the common errors people make when they buy a business.
1. Choose the right business
Before you embark on your business search, spend time ensuring that you’re looking in the right direction. That means being completely sure what you enjoy, and what your strengths and weaknesses are. You are more likely to find business success if you buy an opportunity that you have a passion and interest in. Remember that you will be devoting your heart and soul to your venture, and probably a few years of your life! Finances are important, sure, but make sure that you buy something you will enjoy.
Do take advice from friends and family, but be wary of advice that focuses on money, power and prestige: lifestyle is a very important factor in your business search, and only you will know which opportunity gives you that “zing!” feeling. You can and should invest some time and money into getting good financial advice, but some of your decision making will be guided by your gut feelings, your belief in yourself, and a leap of faith.
2. Pay the right price
Business valuations are an art, not a science. Overpaying is the biggest fear that first time buyers have. It is important to take advice from people experienced in this field. Advice could be sought from an accountant, a valuer, an experienced business broker, and other business owners in this field (you might like to find a mentor in your sector). Several methods are available to obtain the range of values offered by the business opportunity. The most reliable and effective method of valuation uses an income multiplier formula.
When you’re setting your budget, consider some other factors, such as not buying too big or too small. If you buy an opportunity that is too small, it might not make you a sufficient income, or it might be difficult to sell later on. Conversely, if you buy too big, consider whether you can afford a large financial commitment, or what the management issues might be in a large venture. Try to find a venture that’s just the right size for you!
Valuations should be based on verifiable financial data, while factoring in likely return on investment. For a smaller (eg retail) venture, your interest should focus on what the takings are. Ask to look at the invoices, ask to attend the business for a trial period, and perform your own observations (eg sit outside the shop to observe trade). For a bigger business you can also rely on the past history, such as the profit and loss statements for the past 3 years, and consider market trends (are things going up or down?).
3. Surround yourself with supportive advisors
Before you make your big decision, it is important to rely on good advice. That might come from family and friends, business mentors, a lawyer, an accountant and a business broker. Just make sure that your professional advice comes from the best team that you can afford, and that any advice from family and friends is supportive of you.
There’s just one thing we want to let you know, when you take professional advice. When you see a lawyer or an accountant, you are paying them to advise you on risks. By nature, they are very cautious, risk averse people. If you follow the advice of your accountant and lawyer, there is a good chance you will never buy your own venture. But our guess is, if you’re the type of person who’s thinking about buying a business, then you’re a bit edgier: you’re ready to take a chance that with your knowledge, skill and hard work, you can be your own boss, and make a go of life. That outlook is what it takes to be a business owner. We highly recommend you to take advice from several sources. But you need to just throw it all into the mix, weigh it all up, and make a decision based on a mixture of data and gut feeling. You need to be willing to take a chance.
4. Get your timing right, and don’t waste time
The internet can seem very useful at first, when you’re looking to buy a business. The problem is that you keep looking… and looking, and looking. Most people spend hours and days trawling through online listings, without any useful outcome. Our best advice is to spend time online looking into what you’re interested in at the start of your journey. This will be time well spent, as it will educate you about what opportunities are available, and side information (such as what asking prices are, takings, and rental costs). But once you stop learning, stop looking and start dealing with real people and making real phone calls. Basically, stop dreaming and start acting.
If you spend too much time online, you run the risk of good opportunities being sold (good ones don’t last long, and many websites do not update when a business is under offer). Once you pick up the phone, and line yourself up with a good business broker, things will start moving properly. Current, live opportunities will present themselves, and you will move your “business buying education” along. You will move much further on that if you stayed at home, trawling online business listings. Once you start dealing with a broker you will learn more about what’s for sale, at what price, and what their strengths and weaknesses are. Then you can start visiting some businesses, and making a proper shortlist.
When a good opportunity comes along, don’t waste any time. You will need to act, because a good opportunity will only be snapped up by someone else who has funds available and is ready to jump. An opportunity won’t wait for you to be 100% ready. When the right thing comes up, other people will be ready to offer when they’re 80% ready. Get your finances ready in advance, so that you are in a position to move when opportunity presents itself.
Remember, luck is what happens when opportunity meets preparation!
If you’re looking to become your own boss in the new financial year, this is the time to get the ball rolling. For a confidential discussion telephone First Choice Business Brokers on 9899-1888.