Lots of entrepreneurs are choosing to buy existing businesses because it is much less risky than starting one from scratch. However, it is not without its own pitfalls so here are some common mistakes to avoid when buying a business online.
Roughly 90 percent of startups fail within the first few years, so many savvy investors are instead looking toward buying existing businesses.
A total of 8,647 businesses were purchased in 2021, according to a report from the online business selling site BizBuySell, a 16 percent jump over the previous year.
Before you actually sign the deal, you’re going to want to have a clear vision of what you want and complete thorough due diligence.
Here’s a look at 10 common mistakes when buying a business online.
Not having a clear vision
One of the biggest mistakes when buying a business online is failing to have a clear vision. You should have very clearly defined criteria that fit your specific investment or professional goals.
Just a few of the factors to consider are:
- Industry
- Size
- Location
- Business Structure
- Employment type
- Profitability or established revenue
- Public relations or branding issues
- Legal issues
Settling on which business to buy is likely one of the biggest financial decisions you’re going to make so you’d better get it right.
Failing to get enough capital
You’re going to need enough money to purchase the business that fits your investment thesis and also have enough left over to cover operating expenses for at least a little while. Don’t rely on existing revenue alone.
Consider all of the funding options available to you, including loans, investments, crowdsourcing, etc.
Buying a larger business is generally less risky than a smaller one, they’re less susceptible to swings in the market. You can purchase a larger business with a smaller amount of personal equity by using third-party investors along with an SBA loan.
Ignoring due diligence
You should conduct a thorough analysis of any potential sale before closing the deal.
This can include:
- Detailed financial documents
- Research on a given industry
- Creating a marketing strategy
- Understanding employee, customer, and financial policies
- Customer base
You should strongly consider enlisting professional help like a broker or business lawyer while conducting due diligence.
This might cost a little in the short term but it could save you a lot over the long term by weeding out non-viable options.
Not knowing where to look
You’re going to want to consider lots of options before narrowing it down to several that will require more serious scrutiny. Lots of prospective buyers aren’t simply looking in the right places.
There are lots of websites like BizBuySell or Flippa that will give you lots of options. However, connecting with a business broker will likely open up the whole range of options available beyond those listed online.
Poor communication with the seller
Another common mistake when buying a business online is poor communication with the seller.
Remember that they have likely put years or decades into growing their business and they likely care about its long-term future even if they aren’t involved. This is about more than just receiving a cheque.
Ask good questions about the business and show genuine interest.
Closing the deal on good terms can also be beneficial if you encounter unexpected problems shortly thereafter. The previous owner is more like to offer advice and insight if they feel that you are a good steward of their business.
Buying above your budget
Although there are good reasons to buy a larger business relative to a smaller one, you don’t want to stretch yourself too thin.
A common mistake is to buy above your budget.
Consider if the business needs further investment to grow according to your plan. If so, you’ll need to account for that.
You can’t buy a house and then have nothing left over for the mortgage payments. The same is true for a business.
Not understanding why a business is for sale
This can be a tricky one to figure out but you should really try to ascertain why a business is for sale. Knowing this can help you negotiate but it can also help you avoid buying a business that just isn’t going to work out.
If the owner is in personal bankruptcy, they likely want to sell because they need the cash. If they’re trying to get out ahead of a looming market shift, you should probably look elsewhere.
Assuming that things will stay the same
A common mistake when buying a business is assuming that things will stay the same. A new owner will always do things a little differently and have an impact on employees and customers.
Be aware of the potential for change and its impact on your business.
Not understanding goodwill
When you buy a business, you are likely buying the vast majority of its existing customer base. Don’t underestimate the value of the goodwill this company has built over the years or decades.
How loyal are these customers? Are they comfortable with new ownership?
This is an intangible asset but a very important one as you transition the business into your operation.
Making changes too quickly
Change can be difficult for everyone so is wary of making too many modifications too quickly.
This can affect both your employees and customers.
Take time to get a feel for your new business and implement changes you feel are necessary when the time feels right.
Conclusion
If you’re considering buying a business online, try to avoid these common pitfalls.
Make sure you do a thorough search in the industry and geographic area that suits your needs.
Conduct an extensive due diligence check.
Connect with the seller so they understand that you want the best for their business moving forward.
Don’t underestimate the value of your customer’s goodwill and don’t make too many changes too quickly.
If you’re looking for more help in determining what business is a good fit for you, consider Acquira’s business accelerator program which provides training and advice to become a profitable business owner.
