Buying A Business - How You Can Avoid One Of The Biggest Business Buying Mistakes

First time business buyers are often notorious for letting the emotion of buying a business cloud their judgement and skip the all important risk assessments and due diligence..

....but there are major pitfalls and commond mistake which can have devastating consequences. The good news is, they can be avoided.

Firstly, consider this question:

How do you know if you are truly suited to running your own business?

Most of us at some stage have longed to leave the confines of the 9am to 5pm job and pursue one of our passions to make a living out of the thing that we love to do most, be it a love for:

- Cooking
- Writing
- Interior Designing
- Teaching
- or just following your current line of work

However, let’s be frank, some people are better suited to employment than self-employment and don’t have the skills, knowledge or personality to run a small business.

Have you ever noticed some businesses seem to change owners frequently?

Throughout the years of business broking I have seen many Restaurants and Cafes change hands often to first time business buyers who are following their passion for cooking.

They are so excited, with huge future plans, new menus and a tone of enthusiasm. After all, their family and friends love everything they cook.

Yet 6 months later their business is for sale, so what happens?

The simple answer is not everyone is successful or well suited to self-employment as they possibly lack the appropriate skills for business or they have purchased the wrong business.

Cooking for paying customers is very different to cooking a meal for friends or family at home. Your friends and family are biased and are not a true indication of your actual culinary skills.

If you fancy yourself as a bit of a cook and have visions of your self as master chef and it’s your first business, it may be best to look at gaining some industry experience first or at least buy a business that is not going to require a demanding menu only achieved by a full a la carte chef.

However, there are both advantages and disadvantages to self-employment and it’s up to business buyers to educate themselves to ensure they get the best outcome.

Who Educates Business Buyers?

When you’re looking to buy a business you need to consider more than just the financial return on your investment. There are a number of other matters to take into account to ensure it really is the right business for you, such as:

o Is your intention to work in the business?
o Would you ideally be buying the business to run at arms length?
o Do you realistically have the skills required to operate this particular business?
o Is the business going to suit your personality?
o Consider the trading hours, what about the businesses location!

These are just some of the areas that Marilyn and Ray overlooked when they bought their first business.

It was quite sad hearing their account of buying the wrong business, however as a business broker and business valuer it is not an uncommon conversation, unfortunately it’s just different versions of the same story. Naturally I have changed their names and details but this is their story.

It all became very clear in the first few months, Marilyn and Ray had made a terrible mistake in buying the business but, not being quitters {their words} they kept going for a lot longer than most.

Let me first give you a little background on them, Ray a Mechanic and hobby farmer was retrenched, he had a good payout and they were in a comfortable financial position but still too young to retire, they would need to replace the income in order to maintain their lifestyle, and future retirement, Marilyn hadn’t worked out of the home for many years however was excited when Ray suggested that they look at buying a business, they had 2 daughters still living at home and thought a family business that they could all work in would be wonderful.

After a very short time they found a business, a Jewellery store in a small shopping centre located in a trendy inner city area, the girls fell in love with the business, it would provide a job for all of them and it was decided Ray could stay on their small property and continue with the hobby farm and be responsible for the business bookwork.

Ray said he was relieved, after all what did a big burly bloke know about jewellery. The business was 70 minutes drive from their home but the plan was that they would share the work so Marilyn wouldn’t have to go down every day and the girls were so excited about the thought of the business.

None of them had ever worked in Jewellery or for that matter retail before but they all loved jewellery and joked that they had equivalent to a PHD in shopping for jewellery.

One additional aspect to this business was the outgoing vendor indicating the true profit of the business wasn’t reflected in the financials and actually showed Marilyn and Ray a safe full of money indicating that it was black money.

WARNING
Black money; is money in the business, which is unaccounted for and untaxed.
There are many ways you can be tricked into believing that extra money (black money} exists when in actual fact it doesn’t.
The old saying to vendors that claim to have black money is if you take it one end you lose it the other.

And the outgoing vendors would only provide 1 weeks training as they were moving overseas.

Are your alarm bells going off for Marilyn and Ray?

So Marilyn and Ray purchased the business and paid far more than the correct value.
They did provide jobs for their daughters – but they replaced all the experienced staff.

They had no understanding about retail and fell victim to every salesperson with slow moving stock, quickly becoming overstocked
The daughters couldn’t work together and rapidly lost interest and left the business altogether.

Marilyn worked every day. Remember the business operates 7 days a week.
They couldn’t afford additional staff as the business never achieved the sales they expected so surprise surprise, no black money.

Ray had to help in the shop – it’s fair to say he was a fish out of water and was very uncomfortable as he is a country bloke more at home pulling motors apart and moving cattle around a paddock – he wasn’t really the right personality.

The business was in decline and poor Ray and Marilyn heading for the divorce courts.
The Business was sold at a greatly reduced price, with Ray and Marilyn losing more than half of what they had originally paid for the business.

Over and over, we have seen enthusiastic, honest, hard working business buyers who have used their home and life savings to buy a weak and totally inappropriate business, or worse still are tricked into buying somebody else’s problem with disastrous results. If only they had been better informed about business evaluation before buying they would have had a very different outcome.

Business buyers who are aware and educate themselves to ensure they are fully familiar with the ins and outs of buying the correct business reap the rewards of their investment – many times over!

P.S.
As for Marilyn and Ray, after a well earned break they decided to get back on the horse so to speak and have purchased a new business.

They didn’t rush into the purchase this time but really got clear on what they wanted from a business and took into consideration their short term and long term goals, as they said "this time we had a very different approach and outcome looking at some 40 different businesses and when we eventually found the right business for us we didn’t take anything at face value we carried out our due-diligence and we made sure we understood the business buying process and we have a very different end result".

By: Lee Artis
Author of 'How To Buy a Business'
The GBR Group
The BizSale Kit