4 Pitfalls to Avoid when Buying a Business

Buying a Business

Buying a business is not an easy process. Now, of course, it’s not the same as opening your own, but the amount of legal hoops, bureaucratic nonsense, and just general management issues sure make it feel like you are. But, the advantages are certainly apparent. You start off with something that is pretty much ready to be run. The potential income can be substantial, and, of course, the challenge and risk really do get your blood running. Below, you will see the most common pitfalls that get potential business buyers into trouble.

Getting the wrong type of business

The first thing you need to keep in mind is the actual business you are choosing. Now, this doesn’t just mean how it operates, what its history is (this permeates the entire article you are reading). Rather, what line of work are they in? Is this something you have experience in? Do you believe in the product or service they offer? Do you have any experience and knowledge regarding this line of work?

You need to be a special kind of person to be an entrepreneur. This means one needs to be a hard worker, thorough, and persistent. However, passion needs to be here too. You need to be passionate about the line of work you do, the thing your new business focuses on. If you haven’t figured it out already, you need to think long and hard about whether that line of work is right for you or not.

Forgetting to vet the business’s financial and encumbrance history

The last thing you need is to acquire a debt-ridden, lawsuit-hounded business that’s been in the red for years. But, this may be obvious. Its encumbrances and loans may be another matter entirely. Less-reputable and downright immoral people will hide any liens, loans, and encumbrances in the fine print.

For example, if there is some kind of warranty or lien on some of the business’ assets, you need to know about this. Run a lien search, see if any third party has stake and interest placed on any assets the company has. Hire an agent or advisor and let them check this for you. While this may carry a certain cost to it, a lien search will give you peace of mind and can save you from a disastrous investment.

Next, figure out why this business is being sold. Is it in the red because of poor management, thus being an exception, or is the whole industry tanking?

Not setting up non-compete provisions

Dishonest people sell their businesses as a means of opening another of the same type next door. They let an entrepreneur essentially fund his own competition. This is where non-compete contracts and provision come in.

Now, a non-compete provision inside of a sales contract essentially means that you set out certain rules regarding them competing with you. It should define what kind of business the seller is not allowed to work in and to own. Furthermore, it defines the geographic scope (i.e. where he or she can open this new business), and the time frame. The last thing you need is the competition opening a new company next door, with your own money.  

Let a lawyer or certified company draft up the business purchase agreements with this in mind. You can, of course, do it yourself, but unless you have significant experience with legal regulations and provision, you should probably leave it to the professionals.

Not being thorough

You need to be on the ball at all times. Just because you bought somebody else’s business doesn’t mean can go on auto-pilot. So, you need structure, you need plans, you need schedules. The first thing you should do is write up a business plan. Now, this can be a modified version of the plans used for this business before, or they can be completely new. The structure, hierarchy, organizational system, it’s all up to you to control. If you bought a business in trouble, you should look through their plans with a fine-toothed comb in case there are any nasty surprises waiting for you.

Conclusion

Purchasing a business can be an exciting and lucrative venture. But remember, it’s not a walk in the park. Even if you have multiple companies behind you, every one of them requires planning and effort. You always need to be thorough, and practice due diligence. Set up the right agreements, check the company’s history, and be certain that this is where your passions are.

(Visited 4,459 times, 1 visits today)

Comments Go Here ▼

Comments