Note: The following article is not legal advice. Competent legal, tax, and financial counsel should be obtained before doing a deal.
Common Pitfalls in Buying a Business – An Introduction ©
By: Dennis J. Gerschick, Attorney, CPA, CFA
This is the first in a series of articles that will address the mistakes that are commonly made by purchasers of a business. The mistakes I’ll address are made at every level – from the buyer of a small “mom & pop” business, to executives who buy multi-billion dollar businesses. The mistakes made are often the same, they just vary in their scope. We should all learn from our own mistakes, but that is often a painful and expensive process. Consequently, I believe it is much better to learn from the mistakes made by others.
A buyer of a business can make many different mistakes, some are more consequential than others. This series of articles is not intended to address every potential mistake, – that would be impossible. However, this series will highlight numerous mistakes that are commonly made. A partial list of common mistakes includes:
1. The buyer is too anxious to close the deal.
2. The buyer overpays for the business.
3. The deal is not structured properly.
4. The buyer’s due diligence is inadequate.
5. The purchase price is not financed properly.
6. The purchase and/or financing are not documented properly.
7. The buyer does not know or does not fully understand the business.
8. The buyer does not have any acquisition criteria.
9. The buyer does not get appropriate professional assistance.
10. The buyer fails to consider all of its options.
It is important to understand that several of the above are interrelated and are not completely independent. An important aspect of buying a business is to buy it at a fair price, not an inflated or overvalued price.
Buyers should consider their own motives for buying a business. What are they trying to accomplish? Are they buying a job? Have a desire to be their own boss? Want to eliminate a competitor? Many people have taken early retirement and used their money to buy a business. Many of them viewed it as taking a step down from a large publicly-traded corporation to a small private company. Many of them have suffered the consequences. What is better? Working in a large publicly-traded corporation or a private company? There is no correct answer because they are simply different worlds. The skills needed to succeed in each are different. Executives of large corporations often cannot adjust to working in a smaller business. They simply do not have the experience or the proper attitude.
How badly does the buyer want to do a deal? I advise clients that they should not get emotional. I tell clients, deals are like trains – another will come along in fifteen minutes. You should not feel compelled to do every deal that comes along. This is easier said than done, because as I’ll explain in a future article, as a person invests more time and money investigating a potential deal, the harder it is for them to simply walk away from their investment. They start to believe they have to do a deal, and will spend whatever it takes to get it done.
© 2007 Dennis J. Gerschick All Rights Reserved