5 Mistakes to Avoid if You Plan to Buy a Small Business in 2021
The process of buying a business in North Carolina takes time, energy, effort, and money; all of which are often wasted by many entrepreneurs and investors as they fall prey to several common oversights, omissions, or inaccuracies. As such, today we'll discuss 5 serious mistakes to avoid if you plan to buy a small business in 2021, and how you can avoid these mistakes.
Mistakes to Avoid if You Plan to Buy a Small Business #1: Don't be an Arrogant Buyer
Covid-19 has done a number on millions of small businesses across the country. As such, many small business owners are either closing their doors or looking for buyers. While this is an incredible opportunity for entrepreneurs or investors looking to expand their portfolio, it would be wrong to assume that you as the potential buyer are somehow smarter or better qualified to run the business than the current owners.
Even in the current economy, small business owners have done many things "right" with regard to getting their business ready for sale; they just may no longer be interested in continuing to operate that business. While there are plenty of unprofitable businesses out there, you as the buyer should be most interested in investing in profitable, sustainable businesses. As such, give the current owners some credit. They've worked hard to get their business to where it's at.
Mistakes to Avoid if You Plan to Buy a Small Business #2: Don't Hyperfocus on the Purchase Price
The Purchase price is important but isn't the only important factor to consider when purchasing a small business. The way the deal is structured, how income and other aspects of the transaction are negotiated, cash requirements and other operational details are even more important when it comes to buying a small business in 2021.
As such, be careful to get too excited about the purchase price before speaking with your lawyer. Your small business attorney may be able to gain unforeseen opportunities and help you understand structuring and tax alternatives that will help you understand some of the non-purchase price costs that will be incurred upon closing.
Mistakes to Avoid if You Plan to Buy a Small Business #3: Don't Fail to Recognize the Actual Costs of Buying a Small Business
On a related note, a novice buyer may not realize all of the costs associated with acquiring a business. The amount owed to the seller is just one small part of the total sale. Additional costs that the buyer will incur include:
- Accounting fees
- Attorney fees
- Broker or finder fees (if a broker or finder was involved in the transaction)
- Opportunity costs relative to pursuing this transaction such as time and other resources to pursue and close the deal
- Transition/Training time as employees learn new owner's objectives, culture, process, procedures, etc.
Buying a small business can be a lengthy process. Make sure you take the blinders off before you finalize the transaction.
Mistakes to Avoid if You Plan to Buy a Small Business #4: Be Careful to Misalign Performance Expectations
Remember when we said that buyers often believe that they are somehow "better" than the previous owners; as if the only reason that the current owners are selling is that they didn't know how to run their business. We know that this is hardly true, but this attitude tends to carry over into the management of the business once the sale is closed. We call this the "Hero Complex."
For example, new owners have a tendency to overestimate gross profit and revenue during the first two years of operation, believing that the numbers will improve simply because ownership has changed hands. As such, if you want to avoid this mistake, make sure you're seeking advice from your small business attorney or a consulting firm that specializes in mergers and acquisitions before going too deep.
Mistakes to Avoid if You Plan to Buy a Small Business #5: Pay Attention to Your Cash Flow
Finally, something we regularly see when working with small business owners and investors is a failure to understand how much cash is required to negotiate the deal, close the transaction, and then operate the business post-acquisition. Cash is king. As such, don't spend all your money just trying to buy a business. Make sure that you have plenty to manage operating expenses once that small business becomes yours. Otherwise, your business will be dead on arrival.
Contact our Eldreth Law at any point if you have questions regarding small business acquisitions, incorporation, partnership agreements, forming a business, or other legal inquiries. Our small business attornies in Raleigh are here to help you from the beginning stages of your new business.