Most new small businesses fail within the first five years. This confronting fact has led many prospective business owners to buy an existing business instead or enter into a franchising agreement.
Buying an existing small business still has many risks, though. Here are some of the most common mistakes people make when buying a small business and how to avoid them.
Not Choosing the Right Industry
You need to spend a lot of time searching for a business that you can successfully manage. This includes considering the business’s capability to bring in money as well as what you enjoy and what your skills are.
Your business is much more likely to succeed if you have an interest and passion for it, as well as the appropriate skills. Examine the marketplace you’ll be operating in and ensure that there is an adequate base of customers. Buying a small business is a huge investment of both time and money, so it’s important to make a good decision.
Not Doing Due Diligence
Conducting due diligence ensures that you have access to important information about the business you’re buying. This allows you to assess the value and the associated risks that come with the business.
During this process, you thoroughly investigate the business’s operations, legal and tax compliance, financial performance, supplier and customer contracts, and other assets. You want to make sure you don’t get stuck with any outstanding bills, rent or other debt.
Not Considering the Seller’s Motivation
Like any seller, the previous owner will try to make the business appear as successful and attractive as possible. Just because the business shows a profit, it doesn’t mean there aren’t any problems.
Perhaps a big competitor is about to move into that market. Or maybe the business isn’t very profitable after all. There are a number of tricks that can make a business appear more successful than it is, such as lowering the amount of stock before selling to reduce the expenses on any financial documents. Ask a lot of questions and make sure you understand the seller’s motivations and what the business environment will be like when you take over.
Poor Business Strategy
Understand the strengths and weaknesses of the business you are buying. Understand the competition you face in your business environment and what, if any, competitive advantages the business you’re buying has.
Make sure you can formulate a marketing strategy that will gain traction in that market and set you apart from competitors. Study similar businesses in the area very closely to get an idea of what does and doesn’t work.
Poor Business Structure
Ensuring the business has the right structure is vital to your chances of success. Make sure you understand the advantages and disadvantages of each business structure from sole trading to franchising. It’s hard and costly to change this later down the track if it becomes a problem.
If you’d like advice about buying a small business that fits your interests, skill sets and business environment, get in touch with the Saver6 team. Saver6 is a small business support platform with 25 years of experience. We can provide a range of services including targeted marketing, website development, training and accounting.