Five mistakes to avoid when buying a business
Read time: 6 minutes
Buying a business can be a great way to grow your own company. It’s a quick way to acquire skilled staff, assets and established customer relationships. Yet it’s also a risky endeavour, with plenty of opportunities for missteps.
Here are five of the most common mistakes entrepreneurs make when buying a business, and how you can avoid them.
1. Not investing in professional due diligence
Due diligence is the process of examining the legal, financial and business records of a business you intend to acquire. It’s your opportunity to confirm the seller’s claims about the business and identify any issues that might—or should—prevent you from completing the transaction, such as overdue taxes, poor accounts receivable turnover or outstanding litigation against the company. Due diligence will also help you determine the right price to pay for an acquisition.
You might be tempted to do this review yourself to save money, but you will be at risk of incurring much higher costs later if you miss something.
Professional legal advisors, accountants and other consultants know what to look for, so budget for their services if you’re serious about buying a business.
2. Buying for the wrong reasons
Any business you buy is likely to be with you for a long time, so don’t just take the first one that comes along.
It can be tempting to jump at an opportunity if you’ve been looking for a long time already—or if a seller reaches out to you—but saying yes just because you can puts you at risk of a bad investment.
Instead, make sure any prospective business fits with your existing strategic plans and goals, and that you have the skills and knowledge to run it successfully.
Look at the market as well: If it’s in a state of flux or the business is struggling to position itself, you may want to think twice.
3. Ignoring culture
Business culture defines how employees work. It’s an expression of a company’s goals and values. While it’s not impossible to merge companies with vastly different cultures, it takes a lot of dedicated effort, and you risk losing some of what made one or both businesses great.
Make sure you audit the culture of any business you’re thinking about buying. Look at everything from leadership style and employee behaviour to business processes and compensation structures.
If you find significant differences, think long and hard about whether the acquisition is worth the effort of bridging those gaps.
4. Not thinking enough about what comes after you buy
Even if you find a business that suits your needs perfectly and has a great culture fit, seamless integration won’t happen by itself.
Put together a post-merger team and establish a target operating model that will fulfill your strategic goals as early as you can. Since uncertainty and unclarity can affect morale—resulting in staff departures or lost clients—communicate your plans to affected stakeholders early, honestly and often. Be reassuring and transparent about what’s going to stay the same and what may change going forward.
Be prepared for the integration to take several months as you merge processes, reorganize teams, adapt to new ways of doing things, migrate to new software and make other changes. Keep communicating throughout and keep your strategic plan in mind when making all decisions.
5. Waiting too long to involve your bank
Some entrepreneurs wait until they’re ready to buy a business and have negotiated the purchase price before approaching a bank for financing. Waiting that long puts your deal at considerable risk. What if the bank won’t provide the financing you need—or offers terms you can’t meet?
Establish a relationship with your financing partner as soon as you start thinking about buying a business. They can help you figure out how much you can afford to borrow so you can go into negotiations with the vendor much better informed. And they’ll work with you to come up with a financing package with enough flexibility to see you through the inevitable post-merger turbulence.