When done properly, acquisition can prove to be a rewarding way to start or grow your business. Normally, entrepreneurs buy a business to skip the tedious process of starting a new company. It can also be done for various economic reasons such as to increase capabilities, cut costs, gain larger market share, obtain a competitive advantage, and diversify products or services.
The great news is that there are millions of businesses operating in the US that you can potentially buy. According to the US Small Business Administration, there are around 30.7 million small businesses operating in the country. They comprise 99.9% of all businesses and play a vital role in the economic life of the nation. Many of these businesses eventually changed hands throughout its lifetime.
Over the past few years, multiple economic indicators have signaled the consistent strengthening of the US economy. So, if you have plans to own a business through acquisition, now is a great time. But before you proceed with your any business acquisition plan, it would help to know the common pitfalls and how to avoid them.
Here are the top 5 mistakes to avoid when acquiring a company.
Buying a wrong business
Choose a business that suits your knowledge, skills, experience, personality, and interests. Running a business requires you to devote your time to it. If a business is not compatible with your values, you can easily fall out of commitment to it and eventually fail.
Avoid this mistake by carefully vetting and evaluating as many potential businesses as possible. Choose the one that best reflects your values, otherwise, the business might not succeed.
Signing contracts under your name
According to an Orlando business broker, this is one of the most common mistakes of business buyers. Signing a contract under your name comes with tremendous legal ramifications. It means that you are assuming personal liability for the company. In case it runs into financial problems or liabilities, you can be held personally liable and your personal assets can be held as garnishment.
Protect yourself and personal assets by starts an LLC, corporation or any legal entity which you can use when entering into contracts or signing documents.
Doing the buying yourself
Buying a business is a major endeavor that entails a lot of legal and financial aspects. While it is possible to do things alone, working with a reliable business broker, tax professional and attorney can help protect your interests.
A business broker can help you find a business that suits your skill set and preferences. Meanwhile, an accountant or tax professional can give you expert advice on financial situation and tax requirements associated with the purchase. A business attorney ensures that contracts are favorable to you. Assemble your team of professionals you can get the best counsel and proceed with the acquisition without problems.
Buying the wrong price
It is a serious mistake to buy beyond the value of the business. As such, you need to have a detailed financial analysis and feasibility study to determine its appropriate price.
There are numerous metrics and aspects that need to be considered such as the company’s financial standing, current and future cash flow, assets, liabilities, competitive landscape, and contracts, among others. Unless you have decent experience in business evaluation and appraisal, you need the help of professionals to evaluate these areas and ensure that you’re paying fair market value.
Lack of due diligence
In major ventures, due diligence is a must. It is vital to the whole business acquisition process. In fact, it should be done prior to negotiations.
Due diligence refers to a careful scrutiny on everything about the prospective business from both the legal and financial standpoint. You want to know the reason business is being sold, its liabilities and debts, existing liens, and lawsuits or potential liabilities. You should also explore on the sentiments of clients, employees, workers, and the market about the potential takeover. This should ensure full disclosure and complete transparency, thereby avoiding any surprises. It should also help you decide properly.
Buying an existing business can be truly rewarding but just like any major endeavor, you should proceed with caution. In general, working with a reliable team of professionals (business broker, lawyer, and accountant) can guide you through the process and help you come up with the best decisions.