Prevent your dreams from becoming a nightmare!

By Leonard Holler, WSBDC Region 3 Director

For many, owning a business is part of the American Dream, right behind owning a home. Buying a business is a complicated and emotional process. Here are some common mistakes to avoid when purchasing a business.

Do not pay too much for the business. You should take care to know the real value of the business before you sign on the dotted line. The results of paying too much may mean higher loan payments, lower profits, tighter cash flow and potential failure.

Do not pay for undeveloped potential. You should only pay for the current operating condition of the business. You, not the seller, should reap the benefits (profits) of time, effort and money it takes to develop the potential of an existing business. If the seller did not choose to invest their resources in developing the business, you should not compensate them.

Do not rely on bad information. Make sure the information you get from a business seller is verifiable. Have professionals check the financial information, documents, leases and contracts.  Use a team of experts to guide you in legal, accounting and tax matters related to the purchase of the business. Analyze the competition, the industry and potential market for yourself.  Carefully investigate the terms of the potential business purchase and get a valuation of the business. 

Do not decide to buy a business without evaluating your own abilities. Can you run this type of business? Can you perform necessary duties that can not be hired? What are your strengths and weaknesses in areas of managing the business? If you contract others to do things like payroll or bookkeeping, have you considered the cost of those services in your budgets? Running a business includes managing people, selling your goods or services, ordering products, doing paperwork and making numerous decisions on a daily basis. You need to understand your capabilities.

Do not buy a business based on your emotions. If you get caught up in the emotions of fulfilling your dream of owning a business, without taking time to do your homework and investigating the business potential, you may make a costly mistake.

Do not change too much too fast. Once you own the business, do not be tempted to make large sweeping changes over a short period of time. You may risk losing customers and employees who do not agree with the changes you make. Unless something needs immediate attention take some time to understand the business and your existing customers’ needs prior to making any changes. Consider soliciting suggestions from your customers and employees before changing anything.

If you’re thinking about buying an existing business prepare to know and avoid the pitfalls; help your dream become a reality.