Buying an existing business can be an exciting and profitable move. But, you should beware of the risks of buying a business that’s already up and running. Yes, as a buyer, you need to know some of the costly mistakes you should avoid in such a business decision. It helps you in making informed decisions to protect you from possible financial losses, legal implications, and interpersonal constraints later in your business.
Let us highlight some of the blunders you should look out for when buying an existing business.
Improper due diligence
Just because business looks successful, it does not mean it is without problems. So, before committing to buy a business, do a solid job in analyzing the business top to bottom. Look at what the business owns, what it has leased, and what it owes, and the likes. You may be surprised to find that a business that looks successful has issues with unpaid bills, or rent and pretty much lots of debt. You have to do proper due diligence before buying an existing business. You will not only familiarize yourself with the company’s assets but also know its liabilities. This will go a long way in informing your decisions before and after purchase.
Paying for future business potential
Some entrepreneurs selling will tend to trade their businesses on the basis of the future projected value. They project the future value by forecasting future growth and profit margins. Paying for business potential is like rewarding the business seller for hard work that you will put in growing the business. Moreover, just because business looks like it has future potential, it may not be so when you take it over. Change in management can affect it negatively. Further, external factors like competition, declining industry, and market fluctuations can also affect your future.
Investing in the wrong business
Buying a business is a considerable investment, and you do not want to put such a fortune in the wrong business. The business you want to buy could be successful, but it does not mean that it is right for you. You may end up being unable to run it because of insufficient knowledge and skill. Also, your personality and interests may not suit the venture and this could render the business unsuccessful.
Ignoring the tax implications of the existing business
Any business, regardless of its size, has tax implications to the buyer. However, an unincorporated business usually has fewer tax implications compared to corporate business. The tax implication range from things like tangible assets, employment tax, and local and state taxes, etc. Therefore, before you buy an existing business, hire resourceful tax attorneys to review the seller’s financial documentation, and federal, state, and local tax returns. If you fail to undertake this critical step, years after purchase, your business could be at risk of tax liabilities.
Signing the business agreements and contacts in your name
As an existing business buyer, do not sign any document on that business with your name. Signing with your name could mean that you are assuming personal liability for the business. This is risky because if anything happens, it means that personal assets are not protected. You better set the business as a limited liability company or corporation, where personal assets are not at high risk.
Exceeding your purchase budget
Do not buy a business that has over exceeded your budget. You still need money to reserve and to cater for the business expenses after purchase. Stick to your budget when buying a business to avoid debts that could lead your business into financial constraints.
Modifying the business too fast
After buying an existing business, you are bound to make tweaks. That said, go slow on changes as you learn. Existing employees and customers may be used to a specific way of doing things. So, when you change it abruptly, they may retaliate. You may lose existing customers as they would view the business differently. Take baby steps on matters modifications and listen to the employee’s opinions on the same. It is also important to keep carrying out your business operations with the current employees as they are the most familiar with the business. This will save you training time and extra costs.
Managing the business alone
Do not assume that simply because you are knowledgeable and have skills, you do not need help in running your newly acquired business. Give an ear to other people’s opinions, advice, and information as they may help you in making significant decisions that affect the new business.
The bottom line is that before buying an existing business, analyze the venture keenly, and approach the process in an organized way to avoid mistakes that could lead to costly losses. Ensure you have professionals who can help ensure you buy the right enterprise with little baggage that will haunt you afterward.