8 Mistakes to Avoid When Buying a Business

Running a business is not a cakewalk, and neither is purchasing one. Acquiring an existing company is a wise f...

  • 8 Mistakes to Avoid When Buying a Business
    Manish Khanna Image Manish Khanna

    8 Mistakes to Avoid When Buying a Business

    • Wednesday 23rd of May 2018
    • Buying

    Running a business is not a cakewalk, and neither is purchasing one. Acquiring an existing company is a wise financial decision as one doesn’t have to start from the scratch, and can enjoy the benefits of owning a well-entrenched venture in the cluttered marketplace. In a dynamic sector, the payback from an acquisition can be pleasantly significant, and the deal will continue to pay dividends in the future as well. However, there have been cases where buying a business has resulted in failure and loss of equity due to common mistakes made by the buyer. Sometimes, it is related to choosing the wrong business for investment, and at other times it is the poor execution of the takeover process that results in a disaster. Whether a business will fetch the desired return or will be lost in oblivion depends on how the transaction takes place. That is why keen entrepreneurs who are looking for businesses for sale in New Zealand must have the wisdom to identify a profitable deal.

    The commerce industry of the country has been witnessing a steady rise in numbers with an addition of 2.3% businesses in 2017 from the previous year. In fact, New Zealand offers a congenial environment for the growth of entrepreneurs with the country ranking on the first position in ease of doing business all over the globe. On the highest per capita GDP global index, it ranks at the 35th place and is placed on the 17th position in the global innovation index, making it a desirable location for trade and commerce. With these advantages on an entrepreneur’s side, investing in an established business is a reasonably decent proposition that can be leveraged. Let us shed some light on some common mistakes that buyers tend to make while purchasing a business so that these pitfalls can be avoided.

    1. Making a wrong choice

    When buying an establishment, the buyer must be well-aware of the nitty-gritty of operating the type of business he has acquired. He should either be experienced in the field or should undergo intense training to learn the tricks of the trade before taking control. If the new owner does not know much about the industry he is operating in, then the future of the company is most likely doomed.

    2. Falling for the face value

    Not everything that glitters is gold. When a seller is gearing up to sell his business, he will make sure that it appears to be a profitable deal. However, one must not go by the word of the seller, carry out a detailed due diligence process to unearth any commercial secrets, debts and loans. Check the balance sheets for the past five years and research about the financial health of the company from independent sources. The buyer should know which parts of the property are owned and which ones are leased to identify the assets and liabilities with ease.

    3. Not valuing the culture of the company

    Every enterprise is run on certain core values which form its culture and environment. If the business for sale is a small family-owned venture which believes in face to face communication with its customers, then transforming it into a corporate set up with no interaction with clients can turn things upside down. The employees may find it hard to cope with the new culture and would not be able to adopt it. This will eventually lead to dissatisfaction and failure of the business.

    4. Falling short of money

    When buying a franchise for sale in Auckland, the buyer should have ample capital to purchase it and keep it afloat in the times of crisis. Usually, the revenue generated from the business can help to cover the cost of the enterprise. However, there are times when the return is less than expected due to fluctuations in the market, and this is when you require cash reserves to fall back on. If you spend all the money in acquiring a brand name, then you might find yourself filing for bankruptcy soon. So the buyer must have savings set aside for the rainy day.

    5. Not doing proper market research

    A buyer should have a thorough understanding of the market which he is entering to comprehend the behaviour of the target audience. Careful and meticulous market research reveals the size of the target market, demographics of the customers, competitors, marketing strategies being used, and positioning of various products. This investigation is essential to gauge the trends in the industry and create an appropriate business plan.

    6. An unfavourable purchase contract

    The purchase agreement should be created after discussing the terms and conditions with the seller and a seasoned lawyer. It should clearly define the points related to ownership of the property, trademarks, intellectual property rights, shares, inventory, debts, and loans. It should state when the transfer of control will take place from the seller to the buyer and how.

    7. Incorrect evaluation of the business

    Evaluating the cost of a business is not easy. The value depends on many factors including the price of the property, assets, equipment, liabilities, loans etc. The buyer must know how to negotiate on the price tag to crack a value for money deal. Also, the buyer must not push the seller too hard to bring down the price as it can annoy him and he could lose out on the opportunity of heading a highly productive company. Consult a lawyer to assess the precise cost and close the deal to match those numbers.

    8. Using your own name

    This is a significant mistake that buyers often make. Using their own name to sign official documents can lead to legal hassles because it would mean that the new owner has assumed personal liability for the business. In the worst case scenario, if the company fails, the personal assets of the buyer can get seized. Thus to protect the personal belongings, the buyer must register the company as an LLC or corporation. Consulting a lawyer can prove helpful in finding the best structure for registering the business.

    End Note

    New Zealand is a promising land for high growth businesses, and there is enough data to substantiate this fact. There was a 3% rise in the number of businesses interested in expansion in 2017 from the previous year. The expansion strategy involved buying new assets, investing in improvement, and targeting new markets. Thus the entrepreneurs are vying for a more significant share in the market and are looking for cost-effective and money-spinning businesses for sale in New Zealand. Whether it is an expansion scheme or acquisition for a sole proprietorship, the key to success is to avoid making mistakes which can take the business down. Do not let over enthusiasm cloud your decision-making ability. A smart businessperson must deal with an opportunity using shrewdness and acumen to gain the maximum profit.

  • Author Info Manish Khanna

    Manish is founder of Business2sell Group of Websites. 

    Business2Sell.com.au is one of the leading business and franchise for sale listing websites. We work with our business brokers, commercial agents, franchisors and private sellers to help them connect with the right buyers for their opportunities. 

    With website now functional in Australia, United States, United Kingdom, Canada, New Zealand and South Africa. We have over 18,000 businesses for sale listed, with over 220 Business Broker and Commercial Agent. 

    I have over 20 years of experience in Web Industry; I have been involved in websites industry since the early years of 1996-97. In my professional career I may have worked for over 10,000+ websites. My Specialty is to build portals or complex online applications.