|
9 worst mistakes when buying a
business -- and how to avoid them
By Jenny
C. McCune • Bankrate.com
 Although
buying an established business may seem easier than creating one
from scratch, there are still pitfalls that can trip up the unwary.
Here are the top nine mistakes as rated by
small-business experts and business brokers, plus how to avoid or
repair the damage:
- Mistake One: Falling
in love with the business and overlooking its potential problems
or defects. "It's exciting buying a business, so it's easy to
get caught up and have faulty judgment," says Ray Silverstein,
president of President's Resource
Organization, a Chicago-based business consulting firm.
The Cure: Realize when you're not being objective. Convince
a friend to help you or hire a consultant who can help you see
things the way they really are.
-
Mistake Two: The
Cockeyed Optimist Syndrome. You're overly optimistic about the
company's prospects and sales.
The Cure: Same as for falling in love. Get someone to
give you a reality check. John Glade, president of Goldcrest
Commercial Business Brokers in Hollywood, Fla., recommends
lowering revenue projections: "If the seller tells you that
the business makes $100,000 a year, consider whether you'd still
be interested in buying the business if it only made $80,000."
- Mistake Three:
The Narcissistic New Owner. You're convinced that you're smarter,
more innovative, are more energetic or otherwise will do a better
job than the previous owner.
The Cure: "Don't just think in generalities," Silverstein
says. "Do you have a concrete turnaround strategy?" New owners
that think they'll just do a "better job" and increase sales may
be in for a rude shock. If you can actually formulate a turnaround
plan it increases your chances of pulling it off.
- Mistake Four: Failing
to do your homework. Due diligence is a given when buying a business.
You do everything you can to ensure that you know everything about
the business before you buy it. It's difficult, though, since
small-business owners often don't keep good records -- plus a
seller is apt to try to paint as glowing a picture as possible.
The Cure: Try to see beyond the superficial and find ways
to confirm what the seller tells you, Goldcrest's Glade advises.
For example, observe the company over a week and see if its weekly
revenues are in line with the annual projections that you've been
given. Or, if you're buying a laundromat, you can ask for water
bills, which will help you calculate how much business the laundromat
actually has had based on water usage vs. what the seller is telling
you.
- Mistake Five: Getting
involved in a bidding war and buying the business for too much,
Silverstein says.
The Cure: Set a firm cap on what you will spend on the
business. If you're outbid, that's no loss. You're better off
than paying too much for too little.
- Mistake Six:
Not thinking through what type of business you want and what you'd
be good at. Corporate refugees often grab at the first business
opportunity, seeing it as a way to escape the rat race. For example,
Glade helped negotiate a sale of a light manufacturing concern
to a couple. It was only several months after the purchase that
the couple told Glade that their goal in buying a business was
to spend more time with their daughter. "This wasn't an achievable
goal and had I known I never would have sold them that business,"
the business broker says.
The Cure: Before you even start looking for a business
to buy, spend time figuring out what would be a good match between
your skills and goals and types of businesses. Glade also recommends
actually "role-playing" before buying a business. If it's a retail
store, spend time observing. See if it appeals to you and if you'd
be good at it.
- Mistake Seven:
Thinking that a change in ownership won't change the status quo.
Employees and customers may well leave if a new owner surfaces.
The Cure: Building in problems into your projections. Expect
that sales may be off initially during the changeover or that
some employee turnover is bound to happen.
- Mistake Eight: Only
looking at the numbers. People very often just want to know how
much revenue a business is making or what its profits were last
year, says Goldcrest's Glade. A buyer will say, "I don't care
what the business is as long as the numbers look good, " according
to Glade. The business broker says, "It's just not that simple.
Buying a business is not like buying a bond with a guaranteed
return."
The Cure: Sure, you want a profitable business, but find
one that will stay profitable and will benefit from your ownership.
If you're the shy type, running a car dealership that requires
you to sell actively probably isn't a good career move. Try to
find a business for sale that can use your talents and strengths.
- Mistake Nine: Thinking
that taking over an established business is easier than starting
a new venture. "Many buyers do not have the same work ethic as
a seller. They may have good intentions, but they don't have the
same drive," Glade says.
The Cure: It's just as hard buying a business and will
require just as much work. "It's important to realize that you
will have a learning curve and will have to work hard, especially
in the beginning," Glade says.
Jenny C. McCune is a contributing
editor based in Montana
To comment on this story, please e-mail
the Bankrate.com
editors
-- Posted: June 15, 2000
|
