07 Jul Mistakes Business Buyers Make
It’s tough to recover from paying too much for a business. And business failure can lead to personal financial failure, and shattered lives and families. Sure, bad timing or bad luck can kill even a good deal, but the goal is always to get in at the right price and terms after thoroughly investigating the relevant facts.
From my experience, the biggest risk that buyers face is cognitive dissidence. Buyers let their desire to buy cloud their willingness or ability to look soberly and objectively at the facts. But let’s face it: you WILL want the deal. You WON’T be 100% objective. So partner with an experienced and trusted advisor, or several, and seek their advice on what to investigate. Gather the facts, and gain assistance in analyzing the facts. Then, heed the advice. To be sure, don’t pull the trigger if all your advisors are advising against.
You need a good deal. Maybe a great deal is a bit much to ask, but a good deal is necessary. Keep in mind, the seller knows everything about the business, and she is selling. Hmmm.
This doesn’t mean she is selling because the future of the business is dim, but it could be the case. And a great way to bridge a gap in price is seller financing. If the prospects for the business are as good as the seller says, then you can pay her more if and when it proves out.
Your goal is NOT to make the seller happy, or hit her number. All you can do is offer and pay a price that is reasonably safe. Take the advice of legendary business investor Warren Buffett. Investing is not gambling. Preservation of equity capital is #1. If you lose your equity, you are out of business. Your desire to buy a business and invest is gone. So in the worst case, you must at least get your invested capital back.
Be sure to work into the numbers a fair return on your time and talent, as well as a return on your investment. The two are distinct and separate.
The best way to find a good deal is to look at a lot of deals. Find a way to see lots of deals. And be willing to walk away.
Don’t bet the bank. If you have insufficient equity, get investors. Don’t get greedy. If things go well, you can try to buy out your partners over time. I’ve found that many investors end up, over time, wanting their money. That can work in your favor. And if you have partners, get a buy-sell in place.
I’ve personally been penny-wise and pound foolish when it comes to buying a business. I won’t make that mistake again. Don’t make that mistake either.
It takes guts to buy a business. If you find a good deal, pull the trigger. A good opportunity won’t stick around long, so you have to work fast. Time and unnecessary delays can cause you to lose out. Do your homework. Analyze the deal. Get your advisors on board. Time is of the essence. And if all signs are go, take a big gulp and get it done.