Buying a Business - The 7 Deadly Sins
Buying a business could be the best decision for you but you need to approach the task methodically and with a clear understanding of yourself as well as the businesses you consider. Here are the mistakes many business buyers make.
We call them the Business Buyer’s 7 Deadly Sins:
Buyer Sin #1
Buyer’s failure to seriously investigate and understand their personal financial situation before they begin the process of investigating businesses to buy. How much ready cash do you really have for a down payment? Where is it? Will your family and friends really back you? What are the tax consequences of accessing the cash (401k/IRA)?
Buyer Sin #2
A Buyer’s failure to understand how much money they need to live on, month-to-month. This is often called your “burn-rate”, which needs to be absolutely as accurate as possible, by month, for at least 1 year.
Buyer Sin #3
A Buyer’s failure to understand the difference between profits and cash flow. Profit is what the books say the business made. Cash flow is what cash, the owner, can actually use. You can’t spend profits, you can only spend cash. You can have a lot of profits and no cash.
Buyer Sin #4
A Buyer fall’s in love with a business that makes absolutely no sense for them. Buying a business is a lot like picking a spouse, what’s good for one person might not be good for the next. If you are working with Business Brokers or another intermediary first make sure you understand who they represent in the deal...you or the seller. Then consult with them about the skills required to operate the business and also discuss this in detail with the business seller.
Buyer Sin #5
Getting advice from people who don’t know what they’re talking about. When a business buyer seeks advice about how to buy a business they need to first check out the person giving the advice to see if they know what they are talking about. I don’t care, and neither should you, if your golf buddy the dentist has an opinion on a trucking company. You need to understand what you're buying when you buy a business, not your neighbor, not your golf buddy but YOU!.
Buyer Sin #6
A Buyer sometimes crosses the line from skeptical to cynical. If you want to buy a good business from a good seller you need to start from a basis of trust but always verify. Also, here's information about maintaining confidentiality during this process.
Buyer Sin #7
A Buyer sometimes fails to understand why they think they want to buy a business. Are you just worried about getting fired from your current job? Do you really want to make all the decisions? Should you make all the decisions? Are you prepared to have no one else to blame? Can you identify priorities and do you have the self-discipline to manage them?
The good news is you can, if you are honest with yourself, protect yourself from the Buyer’s 7 Deadly Sins above……..