Sometimes the best way to talk about how to do something well is to start with how not to do it. Here are a few thoughts on the common mistakes I see people make when they buy a business.
Economic uncertainty makes the impact of these mistakes greater. So, if you are buying a business please try and avoid them.
Do not pay too much for the business. This sounds simple, but sometimes it’s hard to do.
For the same reason you might bid extra at a house auction (you may love the location and the implied lifestyle etc) people can talk themselves into paying too much for a business.
Competition between other interested parties is not always as visible at a house auction, but the pressure of other buyers being in the wings can also have an impact. Now you need to do more homework than you would have otherwise done on the true value of the business and its ongoing profit potential.
Not having enough funding
We are going to see more business failures in the next six months due to the lack of appropriate credit facilities than we will because they were bad businesses. This not the time to commit all your resources and mortgage yourself to the hilt when buying. You need to keep some powder dry and allow room for further uncertainty. You can count on things not going exactly to plan – and having a war chest of funds gives you room to manoeuvre.
Some businesses will struggle simply because of a relatively small thing such as a change in supplier credit terms.
For example, if the suppliers change from 20th of the month following for payment to seven days because you are a new owner. Previously a business had up to 50 days free credit – now that is only seven. If your customers are not going to pay you any earlier then there is a cashflow gap that either you or a bank must meet. Unfortunately, some people will not be able to.
Investigate whether past results are repeatable
Another reason that a buyer could struggle is that the business model is no longer valid i.e. past results are not repeatable. Just like you will give a house a solid spruce up prior to sale this happens to many businesses as well.
If you come in as a buyer and expect things to continue that same upward trajectory (and your finance depends on that happening) it can be challenging.
Sometimes the reason the vendor is selling will be purely due to retirement. However often it can be a combination of that and the industry getting harder, new competitors taking market share, or customer demand softening.
Too many businesses get the key from the vendor and that is the last they see of them. This exposes the business to risk as there is no continuity of ownership.
This can cause issues for clients, staff, and suppliers. I am convinced many buyers do not explore ways to incentivise vendors to stay and assist in the business longer well enough.
They fail because they bought a lifestyle dream, but it turned into a nightmare. We all know people who have decided to leave busy jobs and buy a business here.
Of course, for many it does work. However, if the rose-tinted glasses were on and the dreams of lifestyle and location influenced the price paid then this can be a problem.
Not only does overpaying become a problem – the non-financial impact of a struggling business is very real (i.e. stresses on the family due to long hours and uncertain income).
Above all, lack of listening to advice, and then failing to act on it in my view is the biggest ender of businesses. Kiwis like to go it alone – we are often slow to ask for help. Too many end up in liquidation that could have been avoided, had action been taken earlier.
If you or a client is thinking of buying a business, then helping them avoid some of these mistakes will go a long way to helping them succeed in these uncertain times.