The 11 biggest traps for you to avoid when buying a business
Buying a business, either as a stand alone or as an add on to your existing business, is a great idea. It has lots of upsides and lots of plusses. But there are also lots of downsides, and traps to avoid. So what are the 11 traps to avoid when buying a business? The brilliant Michael Girdley recently listed them on a Twitter thread. They are as follows;
⚠️ Are you buying yourself a job?
⚠️ Why am I the lucky buyer?
⚠️ Was there a covid blip?
⚠️ Is the seller just ‘fishing’?
⚠️ Will there be a hike in the property/rental costs?
⚠️ Is the business ‘unfinanceable’?
⚠️ Has the business peaked?
⚠️ Does the business fit you/your lifestyle?
⚠️ Will you own the customer base?
⚠️ How difficult is the business to run?
⚠️ Does the business require lots of capital to run it?
The 11 traps to avoid when buying a business
Are you buying yourself a job?
Do you want a ‘job’? Do you want to be the key person in the business, working 9-5 seven days a week? When the seller tells you ‘oh, I only come in now and then, it runs itself’ is that really true?
Why am I the lucky buyer?
Ask yourself ‘why has no-one else bought this business?’ Look for reasons you might not want to buy it as well.
Was there a covid blip?
Covid created once-in-a-lifetime scenarios. Will the future profits, based on Covid years, really look like that? Take a look at how the business was performing before Covid. That should give you a better idea as to what the business really looks like.
Is the seller just ‘fishing’?
What is the seller’s situation, and why is he selling? If the seller is in a position to only sell at a sky high price, due to other external reasons, then you wont be getting a worthwhile purchase. The seller may also just be ‘fishing’ for indicative offers (for various reasons). In bothe scenarios they will simply waste your time, and potentially money.
Will there be a hike in the property/rental costs?
If the business you are looking at is in rented premises, take a close look at the lease, and also the general area that the business is based in, particularly if the lease is up in the near future. What might look like a profitable business now, might look very different with a rent hike, particularly if the business is location-dependent.
Is the business ‘unfinanceable’?
If the business you are looking at may need finance or loans to develop in the future, have a look at how ‘financeable’ it is. Are there lots of fixed assets, or a large order book that you could finance against? Or are all the assets already hocked to the max, or even worse, there are no assets to finance against.
Has the business peaked?
We all know that certain businesses and industries are either cyclical or worse simply grow to a maximum and then decline. Is your potential purchase one of those? Has the market reached capacity and is there only one direction to go now? look at all the aspects of the macro-market. Has the business been active in an unregulated market, and now there’s impending government regulation?
Does the business fit you/your lifestyle?
What do you want? If you’re looking for a business that’s close to home, and only needs a bit of part-time involvement, then the 10 store business based 200 miles away, or the quaint vineyard in France, however profitable, isn’t the one for you. Start with YOUR needs and wants, and then find a business that fits you, not the other way round.
Will you own the customer base?
There are many businesses out there, which may be profitable, but you may not own the customer and/or the customer data. This will have implications into how you can and can’t future market to them. And such restrictions could hamper any re-marketing potential those customers have for you, and the sales and profits they bring with them.
How difficult is the business to run?
It’s a simple question; ‘how hard is it to run this business?’ Do you need a specific skill set? Or experience? Or qualifications? Take our previous quaint French vineyard example. Yes you may have a team of experienced growers, vintners and grape pickers, but if you don’t speak French, its going to be very difficult! The person running your potential purchase now might make it look easy, but could you do the same? There may well be easier opportunities for you out there…
Does the business require lots of capital to run it?
As the Americans say, ‘do the math’. That business you are looking at may be highly profitable, with great margins and a growing marketplace, but is it a cash-hungry business? Take a look at the future projections, and most importantly, the capital requirements. Do you have, or have access, to those kind of funds?
What Next?
Let me know what you think about these 11 traps to avoid when buying a business. What would you add to the above? Let me know if you have any other suggestions.
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