Common Mistakes When Buying a Business

By Iain Mackintosh

There's no denying it - buying a business creates a real buzz of excitement. The key is to make sure this keenness doesn't cloud your judgment and leave you with a business you don't want, or don't know the full history of. Here are some tips to keep in mind for when you're planning on making a big splash to make sure it's one that you don't regret!

Make Sure You Love the Business You Want
The first point sounds obvious, but don't just buy a business because it's a good deal. To turn a business into a real success story, you have to be passionate about what they do, or the way they do it. If you're passionate about the job, and it can use your skills, the battle is already half won, so be certain it's something you can be excited by before you sign any legal documents.

Be Thorough in Your Checks
When checking on the general health of a business you're interested in, it's tempting just to look at the financial statements and chat to the current owner, but this can hide an awful lot of vital information. You want to get a real understanding of everything about the business - its reputation, market and customers. You want to find out about its employees, debts and competitors. In short, you need to know everything about the business - information that legal documents alone won't be able to fill you in on.

Find Out Why They Are Selling
Sure, it may just be that the owner is retiring or they're bored of the business, but are you certain that's the reason? You want a full explanation - if they're trying to get shot of the business, then you might be thinking the same thing a week after purchasing! Do a little detective work and figure out what the deal is. There's every chance you'll still want to go ahead with the purchase, but forearmed is forewarned. If their reason for selling is a big issue you could knock a substantial amount off of the asking price, leaving you with a better deal when the time comes to sign the legal documents transferring ownership.

Get a Good Business Contract
It's a common misconception that the only important thing to consider in a contract is the price you're paying for the company - the truth is that there's a lot more to it than that, and a bad business contract could really hamper your new purchase's chance of success over the coming years. Make sure your business contract is reasonable in terms of payment scheme, debt encumbrance and intellectual property rights, amongst other things. If these terms go over your head, be sure to hire a solicitor familiar with business purchase law to make sure the contract is sound.

Don't Get Ripped Off
In the spur of the moment, and imagining the competition, it's quite easy to end up overpaying for the business you're targeting. Usually businesses have two pricing models: base (revenue or profit) and a multiplier. It's a really good idea to get a professional evaluation of the company to ensure you don't end up overpaying, before you sign any legal documents.

It goes without saying that signing that business contract and buying a company is a big decision, and there's plenty to go wrong. There's plenty to go right as well of course - especially from an informed, well planned and executed sale. If you follow these tips, you're more likely to be celebrating the latter, rather than bemoaning the former.

Iain Mackintosh is the managing director of Simply-Docs. The firm provides over 1100 UK business documents covering all aspects of business from holiday entitlement to employment contracts. By providing these legal documents (with content provided by leading commercial lawyers, HR and health & safety consultants) at an affordable price, the company intends to help small businesses avoid costly breaches of regulation and legal action.