3 Crucial Mistakes When Buying a New Business & How to Avoid them.
If you’re looking to start a new business venture (regardless of whether it's your first or fiftieth), you have two options: 1) build your own from scratch or 2) buy an existing one. And while many entrepreneurs dream of building their own company from the ground up, the reality is, launching a brand-new business can be incredibly difficult. There's a dire sacrifice in creating a business from scratch because you will undoubtedly invest long hours for very minimal financial reward. However, whether your operation is ever able to generate a profit or not, starting your own business can consume your life like few other activities. Furthermore, no matter how much you sacrifice, there’s no guarantee the venture will work out. On the contrary, buying an existing business and successfully making it your own can be somewhat less stressful. After all, you’re buying an operation that has already proven successful, with an existing customer base, brand recognition, and cash flow. But, purchasing a new business isn't so easy after all. It will require hard work and sacrifice. When buying an existing business, the difference between success and failure often comes down to your very first major decision: purchasing the right company. There's a lot riding on your decision. Here are three big mistakes you should avoid making when shopping for and purchasing an existing business venture.
1. Not doing the proper research before buying.
Get all the essential details so that you understand what all you're investing in and is everything represented to you what it’s claimed to be. Businesses can appear to be successful on the surface but that doesn't mean there aren’t fatal flaws lying just below the waterline. An important question to ask is why the business is being sold in the first place. The owner may claim to be retiring to spend more time with the family, but he or she might know that a competing operation is opening a big box store just down the street in a few months. You’ve got to gauge not only the company’s current success, but also its potential for future success and growth. Therefore, you’ll need to get straight answers to a few essential questions:
Does the business own assets? What are they?
What are the current debts or liabilities associated with these assets?
Are there any ongoing or pending lawsuits?
Are there any liens against the business?
Are there any unpaid vendors, suppliers, and/or contractors?
Is the company’s particular industry thriving or in decline?
Are there any agreements that are not currently in writing?
This due diligence should be done well before you begin negotiations with the seller, not a few weeks before closing. The more you know about the operation, the stronger your position will be as a buyer. When it comes to investigating the company’s legal framework and liabilities, we can help you learn everything you need to know to have the strongest position possible.
Many eager entrepreneurs get very excited to own their own company, but fail to put the proper liability protections in place. For instance, if all of your contracts are being put in your name, you're making your own personal assets vulnerable to legal attacks.
In fact, without the proper business entity in place to shield you from personal liability, you could end up losing your home, car, and savings to the company’s creditors if the venture suffers a major loss. To prevent this, you need to have the appropriate legal structure in place before buying. Business entities, such as limited liability companies (LLCs) and corporations, often provide the best protection, so even if the company totally fails, its creditors will be legally unable to come after your personal assets. Meet with us to help you put in place, and maintain the property business entity structure for the operation you're purchasing.
3. Not properly valuing the business
Business valuation is such a complex and nuanced part of the purchasing process. Thus, failing to properly value the business is technically a lack of due diligence. Indeed, every single other factor about the business can be picture perfect, but if you pay the wrong price for it, you could be setting yourself up for disaster. Even if the business you purchase does not fail, what's the point of paying over the value for something when you could have invested those funds in something else to help you maintain and keep the business thriving? Beware that sometimes sellers will created a sales prices that has no reasonable basis in anything to see what they can get for the business. Other sellers will base the price on a hidden motive: to pay off their own debts, to pay for their kids’ college education, or as part of an upcoming divorce settlement. All of these factors have no bearing on the true value of the business. Remember, the seller’s initial asking price has nothing to do with a proper valuation—that’s on you. Here at SLD, we can help you figure out how the company’s tax and legal liabilities fit into the value equation, as well as refer you to valuation experts we know and trust to help with the other areas.
4. Don’t go in it alone
Whether you owned a business or are purchasing a new one, it's going to take a lot of time and create a lot of responsibility. Therefore, you should not try to take on each and every task or responsibility alone. It's important that you create the right team to ensure that your business is successful and stays that way.
We recommend that you hire a team of experts to help with the purchase of a business, if you are going to do it right. As your Innovative Business Lawyer, we can assist you with all of the legal issues related to purchasing a business and connect you with other trusted professionals to help round out the rest of your support team. Make an appointment with us today to get started.