Three Common Mistakes When Purchasing a New Business

Acquiring a business will likely be the largest and most complex purchases anyone will make in their lifetime. While exciting and full of potential, business acquisition also comes with substantial risk. Below are three very common and critical mistakes to avoid when purchasing a going concern.

1)     Under-capitalized Investment – Every business is purchased with the intent of success. After the acquisition is complete, a business should be well fortified with working capital at least enough for 90-120 days of business operation. The most common mistake and one of the most critical is that the business is purchased without enough liquidity and working capital. A new buyer should intently review the business plan and plan for additional capital needs prior to purchase. If growth is a strategy of the business, this growth will require additional capital. Whether it is additional employees, additional inventory, or additional equipment needed to drive growth, it all requires capital.

2)     Purchasing a Business Outside of your Industry Expertise – The Small Business Administration has been tracking loan defaults for years and has substantial experience in the kinds of acquisitions that result in default. For those buyers that purchase within their comfort zone of industry experience, the default rates are far lower than for buyers who purchase outside of their expertise. These default rates are so drastically different that the SBA has incorporated this policy into their Standard Operating Procedures. They now require industry expertise or knowledge before approving a loan. If SBA has incorporated this policy to their lending guidelines, anyone purchasing a business with or without SBA should consider the same.

3)     Going it Alone – Many buyers want to save a few dollars by not using an attorney or CPA in the purchase process. This is usually a terrible mistake. The risk of a bad purchase rises dramatically without proper counsel. There are so many places where things can go wrong and most individuals simply do not have the expertise to go at it alone. In addition, buyers tend to get really excited inside of the purchase process and an independent review of the various components of due diligence by a professional and skilled expert will save you way more money in the long run.

Above are three of the biggest mistakes buyers make when acquiring a new business. The impact of these mistakes can be critical on the ongoing concern of a business. If you are considering a purchase, consider the three mistakes above and review your decisions in comparison to these problem areas.

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