Don’t make these mistakes when buying a business

Often the best way for an entrepreneur to get started is to buy a business that is already established, successful and profitable. But, for the unwary, there are many potential pitfalls and obstructions. Watch out for these common business mistakes.

  • Failing to conduct proper due diligence – Remember to only trust what you can verify yourself, as both the seller and the business broker have a vested interest in making the business look as good as possible. Almost every business has something the owner would prefer to keep hidden – so be sure to dig, examine and question. Look at the books carefully, go through the client list and the sales history. Keep an eye out for inconsistencies.
  • Not investigating the reason for the sale – Even if a formal due diligence process fails to show any problems, try to find out the real reason for the owner selling. Retirement, ill-health and emigration are typical – and legitimate – reasons. But a seller who can supply no proper reason, or is over-eager, may be hiding something
  • Not knowing what you’re willing to pay – This is one of the common business mistakes and, while you don’t have to tell the seller or broker your figure, you should have a maximum price tag in mind and stick to it, no matter what. Do your own research to find out what similar businesses usually sell for. But remember, just because an internet café (for example) sells for x-amount in Cape Town doesn’t mean that it should have the same price tag in Pinetown. A proper value can only be determined via the capitalised earnings stream – in other words, the value today of the business’ stream of future earnings.
  • Not negotiating – It’s common for the buyer and seller to set different prices, particularly early on in the process of buying a business. So if you really want to secure that particular deal, don’t simply walk away after one round of discussions. Rather talk to the seller and try to find common ground or, if you cannot go higher than your existing offer, tell him so. It may be that he’s merely holding out for as high a price as possible and will accept your offer if there’s nothing better on the table.
  • Killing the deal by pushing too hard – Once the negotiations are complete and both parties are in agreement – stop! Going back to the seller for further discussions or clarifications is only likely to take the whole process back to stage one. Some business brokers report that this is one of the most common causes of deals breaking down at the last minute.
  • Accepting claims of ‘phantom’ revenue – Many small business owners, particularly in cash businesses like the food and retail sectors, hide some of their cash income from SARS. Beware of those who try to persuade you to include this ‘income’ in your valuation of the business. There’s no way of knowing if what they claim is true and if they’re lying to the taxman then what’s to stop them lying to you too? Buy a business only on the income that’s been properly reported.
  • Not getting professional help – Unless you’re a very astute businessperson and have been down this road before, it’s unlikely that you’ll have the expertise to go through the process without consulting experts like lawyers and accountants. You don’t have to let them run the entire process, but be smart enough to ask for help when it’s needed – it could save you money and avoid problems in the long run. And beware of offers of help from the business broker – remember he’s batting for the seller’s team!
  • Not asking the seller to stick around – Make it a condition of sale that the seller stays on during the transition period. No matter how much due diligence and pre-sale preparation has taken place, there will always be unexpected problems that arise and chances are the seller, through his experience, is better able to resolve them than you are. Having the seller around can also help to reassure nervous staff and customers.
  • Buying the wrong business for you – This is arguably one of the most serious business mistakes of all and can only lead to disaster. Most entrepreneurs need a business that suits their skills, knowledge, personality and general interests. If you’re not a ‘people’ person don’t go into the restaurant trade; if you don’t have technical empathy, be wary of a wheel and tyre fitment centre. If you don’t like late nights, stay away from a pub-style business.