Whether you’re buying a small business or a large business, it’s easy to make an expensive mistake. For a rundown on what we recommend for a larger purchase, check out our M&A section.
Most people selling small businesses, like most of the ones on Trademe, will have no idea what their businesses are worth, and they’ll want too much money.
If you’re selling and have a business broker then that’s a lot less likely to happen. But not all brokers are created equal and you should absolutely get a second opinion on the price if you’re looking at buying a business. We help with a lot of these, and can quickly and cheaply help work out if the price is right for you.
What kind of mistakes do people make when buying small businesses?
The price isn’t right
Sellers are out to get the best price they can, but often it may not stack up.
You probably don’t need a full valuation on the business you’re buying, but we can do a high level opinion for you pretty easily. Or just tell you if we think it’s worth it. We also focus on you and why you want to make this investment.
No due diligence
For a small business, due diligence can be a short list that’s ticked off in less than a day. The larger and more complex your business gets, the more time and expertise you’ll need. You can get started with our general list – but it’s not one size fits all and you should check with someone if you’re unsure.
An example is if you’re buying a retail business but you don’t check that the stock isn’t old and outdated. Ouch.
Each business has specific risk areas based on the business itself, and also the reasons you wish to acquire it. We can give you an easy list of questions to ask the seller, or discuss them with the seller on your behalf.
You haven’t managed the risks
Again, super easy to take care of at the front end, super painful if you forget.
An easy example is if you’re buying a relationship-based business but you don’t get any kind of restraint of trade on the seller.
We can help you and your lawyer work out how to set up the commercial terms. Lawyers are super helpful and important in the process,ehowever we can complement their skills with the commercial know-how to keep things simple while covering the important risks.
The wrong vendor assistance
It’s pretty hard to buy a business and completely take the reins on day one. Getting the vendor to work in the business for a while cuts down a huge amount of risk while you learn the ropes. Sometimes for larger businesses this could be for years. For really small, simple businesses it could be a matter of weeks or months.
It can be tricky to strike a deal that works for everyone, but it’s usually super important to cover this off, or you might have no customers and no product.
A structure that’s too complicated
It’s good to get a solid sale and purchase agreement, and you may need a shareholder agreement. Some tax advice may definitely be worthwhile. But we’ve seen things go completely overboard. Don’t overcomplicate things. Get some solid commercial advice, cover off key risks, and keep things assimple as possible.
Next steps
We see a lot of businesses being bought and sold, and we’ve bought and sold a number of our own. We’re happy to have a chat with you on a complimentary basis to work out whether you need help, and what that might look like.
