Tremendous mistakes are made by people who are anxious. Business consultants called in by anxious buyers can sometimes salvage the situation, but oftentimes consultants are not called until a deal has been closed. And once your signature goes on that dotted line, you’re stuck with the purchase. So keep in mind that anxiety or impatience isn’t going to help you buy a business. Take your time. Recognize that there’s always time to reflect on the business that’s for sale. No matter what a business broker, a business seller, or any other person may tell you, there’s always time. Nine times out of 10, the business that’s up for sale is going to be around for awhile. And if it’s not, then it’s the seller who is going to be the anxious one; and the seller’s anxiety, of course, is something that can be manipulated to your advantage as buyer.
Some of the more common mistakes are:
- Buying on price. Buyers don’t take into account ROI. If you’re going to invest R200 000.00 in a business that returns a five-percent net, you’re better off putting your money in stocks and commodities, the local S&L, or municipal bonds. Any type of intangible security is going to produce more than five percent.
- Cash shortage. Some buyers use all their cash for the down payment on the business, though cash management in the startup phase of any business, new or existing, is fundamental to short-term success. They fail to predict future cash flow and possible contingencies that might require more capital. Further, there has to be some revenue set aside for building the business via marketing and PR efforts. So, if you have R200 000.00 to invest, make sure you don’t invest the entire amount. Keep some of the capital. Though figures vary from industry to industry, a common contingency is 10 percent. Additionally, you may want to set aside a sum that you regard as your working capital, which in a number of businesses is enough to cover about three months’ worth of expenses.
- Buying all the receivables. It generally makes good sense to buy the receivables, except when they are 90 or 120 days old, or older. Too often buyers take on all the receivables, even those beyond 90 days. This can be very risky because the older the account, the more difficult it’ll be to collect against. You can protect yourself by having the seller warrant the receivables; what’s not collectible can be charged back against the purchase price of the business. For receivables beyond 90 days, give those to the owner, and see if he or she can collect.
- Failure to verify all data. Most business buyers accept all the information and data given to them by the seller at face value, without the verification of their own accountant. Most sellers want to get their cash out of the business as soon as possible, and buyers frequently allow them to take all the quick assets such as receivables, cash, and equipment inventories, and sometimes bring in equipment. The seller talks the buyer into virtually anything, knowing that the buyer wants the business badly.
- Heavy payment schedules. Novice business owners often overestimate their revenue during the first year and take on unduly large payments to finance the buyout. Generally, however, revenue rarely pans out. During the first year of any operation, the owner experiences numerous non-recurring costs such as equipment failures, employee turnover, etc. For this reason, it makes sense to have a payment schedule that begins fairly light, then gets progressively heavier. This is something that can be negotiated with a seller and should not be difficult to arrange.
- Treating the seller unfairly. People think that, because they are buying a business, the seller is at their mercy. All too often, the buyer will be cold, rigid and hard-headed. Sellers with savvy will throw such people out and tell them not to come back. Just because you have some money and may be interested in purchasing the business, that doesn’t meant that you aren’t going to have to give a little in the process of negotiation.