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Don’t Make These Mistakes When Buying a Business

April 16, 2013 | Posted In Business Litigation - Tips for buying a business

Buying an existing business can be a great opportunity to get into business ownership for people who have the investment capital and the management skills, but perhaps not the entrepreneurial spirit.

If you are considering purchasing a business, it is advisable to work with an experienced commercial transactions attorney. Your business lawyer will advise you on how to best protect yourself during the purchase process. He or she will help make sure you don’t make the following common mistakes that many business buyers make.

Don’t sign your own name. This is one of the worst mistakes novice business buyers make. Signing your own name means you assume personal liability for the company. Your attorney can advise you on what kind of business entity you should create to purchase the business you choose.

Don’t buy the wrong business. This mistake is something you need to analyze for yourself, with counsel from trusted friends, mentors and business associates. If you buy a business you don’t love purely because it looks attractive on paper, your chances of success are slim. Buy a business that you can get excited about and one in which the role you play will use your specific set of professional skills.

Do your due diligence. Don’t trust the business’s numbers. Verify all data the seller gives you. Due diligence includes more than verification, however. Examine the return on investment numbers as well as the buying price — each of these numbers gives you different insight into the business’s likely profitability. Do more than read the financial statements, especially if the business is in an unfamiliar industry. Get to know the market, the customers and the position this particular business holds in the market.

Find out why the seller is selling the business. This is another place in which novice business buyers make mistakes. It is also another place where verification of information and data is critical. It’s analogous to buying a house. The seller might say he’s relocating to sunnier climes, but in reality the basement floods every spring. The current business owner might tell you she wants to retire to spend time with the grandkids, but the truth is the business has been slowly dying for years and she’s ready to throw in the towel.

Keep some cash available after the purchase. Access to cash and proper prediction of future cash flow are key components of a successful transfer of a business from one owner to another. Don’t make the rookie mistake of using all your cash for the down payment. Set aside funds for contingencies and for working capital.

The Small Business Administration’s website has helpful, in-depth information on buying a business and is a great place to start getting additional suggestions for how to protect yourself through the process of buying a business.

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