Buying a business is a complex process. It is important to stay alert and focused throughout the transaction. The following are three costly mistakes to avoid when buying a business:
1. Do Your Due Diligence
Take the time to review the tax returns, financials, purchase orders, invoices, vendor contracts, customer contracts, work orders, and other documents associated with the business. Include review by appropriate professionals (i.e. your attorney, CPA, etc.) Many buyers don't want to incur any expenses until they actually purchase the business. However, the few thousand dollars paid to a CPA and attorney for reviews should be viewed as insurance. Is it better to pay a few thousand dollars to learn the business is not going to generate the cash-flow you require without substantial additional investment, before or after you pay the $1.500,000 for the business? If you learn this information beforehand, you can terminate the transaction and walk away having invested only a few thousand dollars in the process. If you don't learn this information until afterward, you are stuck with a $1,500,000 investment which does not satisfy your requirements.
2. Know Your Working Capital Requirements
It is important that you have sufficient working capital to operate the business once the transaction closes. Sometimes buyers fail to consider the working capital requirements and have cash-flow problems from the day they take over. Depending on the structure of the transaction, Accounts Receivable and Inventory may or may not be transferred to the buyer as part of the deal. If not, you will need sufficient operating capital to purchase necessary inventory and you may be incurring expenses without income for 30 to 60 days while your own Accounts Receivables are building.
3. Have Critical Machinery and Equipment Inspected
The last thing you want to do is complete the transaction, take over the business and have an expensive key piece of equipment fail three or four weeks later causing disruption of the business as well as unexpected repair expenses. Any piece of equipment that is critical to the successful operation of the business should be inspected by a professional to ensure it is in good working order.
In summary, do your due diligence, know your working capital requirements, and have critical machinery and equipment inspected. When you do these three things you will minimize the risks inherent in buying a business.