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Risks of Buying a Small Business Without Help

Written by: George J Sierchio

Article Overview: Make no mistake; buying a business is no small task. That goes for huge entities to small businesses alike. Certain things like the amount of time it takes to complete the entire purchase as well as the price is much larger in a large or medium business versus small but, other things are much more intense with a small business purchase. One of those intense things is the...

Risks of Buying a Small Business Without Help

Make no mistake; buying a business is no small task. That goes for huge entities to small businesses alike. Certain things like the amount of time it takes to complete the entire purchase as well as the price is much larger in a large or medium business versus small but, other things are much more intense with a small business purchase.

One of those intense things is the emotion involved. The Seller has a tremendous amount of personal feelings wrapped around the business he/she has built. Even if it was previously bought from someone else. Blood, sweat, tears, and their own money were put into the making of this business. This is also why dealing with businesses for sale directly through the owner is usually something to avoid altogether.

Since you will most likely be laying out a significant amount of your own hard earned money in the purchase and it is a huge event in your life, you to will have an ever building flood of emotion behind you. This emotional intensity can often cause unnecessary tension and irrational decisions to be made or things to be said.

Then there is the factor of risk. All business purchase deals have risk factors but in a small business transaction the risk is almost all personal. The money you will lay out to pay for and modify the business will be yours and/or that of partners, family and friends. You can’t avoid these other people and they are usually on you every second due to the risk they are taking in getting their money back. Most things will need to be signed for personally. Leases, notes, credit, you name it. Unless you have some amazing bank relationships, excellent history in owning a similar business, or get extremely lucky with a lenient landlord, your name will be on everything.

There is no having the business go bankrupt and you walk away without battle scars. And don’t believe anyone that tells you differently especially if you are a rookie in business ownership. If it were that easy, nobody would be an employee of anyone.

Keeping on the rookie status subject, if you are new to an industry or business ownership in general, you are probably in for a rude awakening as to what is involved no matter how well you have done on your due diligence. The top person on the totem pole is the least important person in the business. And that would be you. Everyone else that needs to be paid or serviced comes first.

So let’s get into how you can best avoid the worst possible scenarios in all of these inevitable issues. The simple answer is to get help. Every decision is ultimately yours but the best of the best, no matter how many times they’ve been down a certain road, always have people to turn to. That means you need to as well.

The key is to get help at the right times from the correct people or the correct resource. Many new to the business buying and owning game fail to understand this while others do not know who to get on their team or when as well as realizing there are tools available to them. Still others think it’s an unnecessary expense or consumption of time to even get the help available in a book. Amazing but true.

Seriously though, how can you not want all of the assistance possible before, during and even after an emotionally intense transaction involving a truly significant amount of your money? Wouldn’t you think avoiding the waste of $50,000- $200,000 of your own money, saddling yourself with a loan, and wasting months of hard work by spending 10% of that amount to make sure you don’t make a horrible decision is worth it? From experience I know the truly serious and self respecting Buyers do.

So what do you have to use, who do you have at your disposals and when should you utilize these resources? I’ll do my best to keep this brief and on point.

Let’s start out at the all-important preparation for being a good business buyer. Being a good buyer means that you have mentally and physically prepared yourself in knowing what the business finding/funding/buying process entails as well certain etiquette when dealing with broker/sellers and other professionals you will encounter. A pain in the rear, know nothing (but pretends to know everything) buyer is seen as a nuisance and does not get much positive attention. They are also known for being tire-kickers that don’t pull the trigger. We want to make sure you aren’t one of them.

You have two main choices for learning the process and keeping on track. You can either spend $100-$200 on a toolkit that will greatly help you out or you can bring aboard an Advisor. You should probably do both, but at least one.

This person should be a business buying savvy business advisor, coach or fellow business owner. Or you can hire your own broker. Remember that a listing broker is working for the Seller so even the most honest person will have skewed advice leaning towards the fiduciary responsibility they have to the person that is actually paying them. Do not use a lawyer or accountant for this aspect of help and advice. Most are not qualified to dispense such advice.

Your resource during due diligence would be an advisor/broker and an accountant knowledgeable in the business you are looking to purchase. You can line up an accountant before you find a business to buy, but they are not needed until due diligence. They will come in handy to verify the financials and help you predict future earnings by setting you up with a pro forma. A pro forma sheet also usually is included in business buying toolkits if you wish to do this part yourself. An advisor/broker will make sure you don’t miss the aspects that are not purely financial in nature. Again, toolkits often have this as part of their arsenal.

Do not make the mistake of thinking that lawyers are unnecessary even if you make the bold move of buying a business from a Seller that is not using a broker. Negotiations and emotions are at an ultimate high, especially with no broker involved and there needs to be legal documentation involved whether you like it or not. Lawyers can be used to look over your Letter of Intent, which acts as a springboard should the transaction go to contract. They are definitely needed after due diligence if you are continuing on with the purchase for this documentation including those needed for loans for the purchase being held by the Seller.

One more note on lawyers though. Make sure, like the accountant, you find one early on before you need them and absolutely make sure they are experience in business buy/sell transactions. The wrong attorney can drag out the process, mess a lot of important things up, and ultimately kill a deal on you.

As you can see, there are very useful and reliable resources and professionals available to you from the concept of buying to the closing. Do not take the risk of your money, time, and energy in trying to avoid using everything available to you. You are about to embark on a life-changing journey. Let’s make sure it’s a positive change and not a regrettable one.

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Article Tags: buying a business, Risks of Buying Business



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