Do's and Don'ts for Buyers
Whether this is your first time buying or you are a pro, here are a few tips that will help you prepare for a purchase that you may not have previously thought about. These are meant to help any buyer avoid making a bad deal or wasting time on a bad deal. Buying a business can be a big financial risk and doing so takes a lot of effort to make sure that all risks can be understood and accounted for.
1. Know what you want and be willing to wait
Before buying any business you should take time to consider what kind of business you want. With entrepreneurship becoming more popular you will have multiple opportunities in various industries to buy a business that you want. Knowing what kind of business you want to buy should include general size, earnings, and industry. If you know what you are looking for it will allow you to save time and money looking at companies and allow you to act faster when the right one comes around.
2. Set up financing prior to speaking with a seller
Financing can come in various forms but most buyers don't realize that they can do a lot of the work before you find a company to buy. Creating a buying entity, organizing an SBA loan or collecting equity capital can and should be done prior to speaking with sellers. This will save you roughly a month when you are going through due diligence.
3. Know your circle of competence
Understanding what kind of business you can operate and understand is the most important part to buying a business. Knowing your circle of competence was a phrase that Warren Buffet used when investing and purchasing businesses of all sizes from $8 million to $40 billion. When you get out of the circle of competence you will have big hurdles to climb or you will need to hire outside resources that will cut into the earnings you paid for.
1. Don't assume anything
When you are doing due diligence do not assume anything as it pertains to financials, risk or liabilities. Everything you have questions about should be verified with the seller or outside parties that may be able to provide assistance. The seller is there to provide answers and his answers should be valuable. Any buyer should be requesting troves of information and data and working with a team to comb through it all. Due diligence is about being thorough to verify what you are buying. Do not be lazy.
2. Don't think you do not have to sell yourself
When you have an initial introduction with a buyer you should not be concerned with digging into any details just yet. This first meeting should be about selling yourself to why you can and why you want to buy his business. Remember that going through this process takes a lot of time and money from the seller also and he wants to vet you just as much as you want to vet him.
3. Don't think things will go according to plan
Things will not go as planned for sometimes major and sometimes minor issues. When you have two teams working towards a common goal it always takes time to make sure that everyone is on the same page. Make sure to build in buffers of at least 30 days for your timeline. Also, when thinking about financials and growth be conservative in your estimation not aggressive. Building in these buffers will provide a much smoother transaction for everyone involved.