Avoid These 6 Common Mistakes Made by Buyers

by Dione Mauric 28th of March, 2024

Avoid These 6 Common Mistakes Made by Buyers

Purchasing a business can be rewarding, but it also comes with many challenges and risks. In Australia, entrepreneurs and prospective buyers can make many mistakes when acquiring an existing business. These errors can be costly and have long-term consequences. Let’s explore some of the most prevalent mistakes buyers make when purchasing a business and provide insights on how to avoid them and invest in a thriving business.

1. Inadequate Due Diligence

One of the most critical steps in buying a business is to conduct a thorough due diligence. Due diligence involves scrutinising the financial, operational, and legal aspects of the business you intend to purchase. It also involves considering the business’s brand and reputation within its sector. Unfortunately, many buyers, eager to close the deal quickly, skip or rush through this essential step.

At Advantage Business Sales & Valuations we help our buyers ensuring all the information they need is included in a comprehensive Information Memorandum – business information is presented professionally, comprehensively and in a timely manner, meaning the financial results and other important recent information is current and updated.

To avoid this common mistake, take your time to examine the following:

financial statements;
tax records;
leases;
contracts; and
employee agreements.

Obtain professional advice to help you navigate complex financial and legal documents. Pay attention to any red flags, such as inconsistent financial data, expiring leases or pending legal claims, as they may signal underlying issues.

2. Ignoring Industry Knowledge

Buying a business in an industry you know little about can be a recipe for disaster. A lack of industry knowledge can lead to:

poor decision-making;
difficulty understanding market trends; and
challenges in managing the business effectively.

To mitigate this risk, consider purchasing a company in an industry that you are familiar with. If you are unfamiliar with the industry, ensure you invest time learning about it before purchasing a business. You can gain this knowledge by:

attending industry-specific events;
joining relevant online forums; and
networking with experienced professionals to gain valuable insights.

3. Underestimating Working Capital Needs

Many buyers focus solely on the purchase price and forget to consider working capital requirements. This business mistake has caught out many large and small aspiring business owners.

Working capital is essential to cover day-to-day operational expenses, such as salaries, inventory, and overhead costs. Failing to ensure the business has adequate working capital can lead to cash flow problems shortly after the acquisition.

To avoid this mistake, assess the business’s working capital needs thoroughly. Consider negotiating with the seller to ensure sufficient capital is available as part of the deal or secure financing to cover these costs.

4. Disregarding Legal and Regulatory Compliance

Australia has a complex regulatory environment, and failing to comply with legal requirements can lead to fines, legal battles, and business disruptions. Some buyers make the mistake of assuming that their acquired business fully complies with all relevant laws
and regulations.

To prevent such mistakes, conduct a thorough legal review and ensure the business fully complies with:

employment laws;
environmental laws;
tax laws; and
industry-specific regulations.

Many prospective business owners obtain expert legal advice to address any potential compliance or legal issues.

5. Overpaying for the Business

Determining the fair market value of a business is a complex process that requires a careful analysis of various factors, including:

financial performance;
industry trends; and
market conditions.

Overpaying for a business is a common mistake that can lead to financial strain and reduced profitability.

When appraising the value of a business, at Advantage Business Sales & Valuations we use accepted principles – commonly accepted by accountants and banks.

To prevent overpayment, conduct a thorough review of the business with the help of a professional advisor. Consider seeking multiple opinions to ensure the purchase price aligns with the business’s true value.

6. Neglecting Customer and Supplier Relationships

Maintaining strong relationships with customers and suppliers is crucial for business continuity. Unfortunately, some buyers neglect these relationships, to their detriment, assuming that customers and suppliers will remain loyal after the acquisition.

To avoid this risk, engage with key customers and suppliers early in the process. Assure them of your commitment to maintaining quality service and reliable products. Develop a transition plan to minimise disruptions and keep these relationships intact.

Key Takeaways

Purchasing a business can be lucrative if done correctly, but it is riddled with potential pitfalls. Avoiding common mistakes like inadequate due diligence, industry ignorance, and neglecting customer and supplier relationships is essential for a successful acquisition.

By carefully navigating the acquisition process, you can maximise your chances of turning a purchased business into a thriving and profitable venture. Remember that seeking professional advice and conducting research are crucial to making a fully informed and successful business acquisition decision.

At Advantage Business Sales & Valuations we provide as much information and communicate openly with potential purchasers to minimise the above common mistakes. If you need assistance regarding purchasing a business please contact our experienced team at Advantage Business Sales & Valuations.

Tags: buying business owner small business tips