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10 Major Mistakes Business Buyers Should Avoid - Not Being Able To Compare Businesses

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mistakeMistake #6 - Not Being Able To Compare Businesses

Something changed in your life and you decided to own a business. You could probably start from scratch, but considering all pros and cons decided to acquire an established business. Well, it's a very wise decision as long as you do it right. Unfortunately, new business buyers make many mistakes that make business acquisition much harder, some times causing substantial financial and emotional hardship, other times loss of otherwise promising business opportunity altogether.

Let's review 10 major mistakes that business buyers make that prevent them from successfully buying a business.

 

 

Mistake #6 - Not Being Able To Compare Businesses

Shopping for a business is possible only if you're able to compare one business to another. I am not even talking about comparing different types of business. Exactly same businesses, unless they are franchises, may have absolutely different metrics. Even larger companies, like Groupon, that about to go public, sometimes surprise accountants and general public with their creative accounting techniques. Now, what can you expect from much smaller company where accounting methods are direct result of its owner's needs for accurate information. Even if the right software is used, like Quickbooks, accounts can be named differently, and funds allocation to each account is pretty much freestyle exercise.

Do ask for financials statements over the past 2-3 years. Compare income and expense categories. Ask about meaning of each category if anything isn't clear. Sometimes payroll may include just payroll expenses, other times it may include payroll and payroll taxes, or payroll + payroll taxes + payroll service expenses, or any other combination thereof. If you see Payroll Expense category and don't see payroll taxes and payroll service charges, don't automatically assume that they are included in the above category - they may simply be forgotten. Re-write the financial statements, so they contain all necessary categories - use same categories for all businesses. If original document contains consolidated categories, ask to break down to your meaningful categories. Don't overdo it, though, owners won't satisfy unreasonable requests, however may accommodate you if they feel you're really interested.

It obviously would be beneficial to have some experience in the target business field. Otherwise, how would you know that certain expenses should be there in the first place. For example, you're reviewing financial statements for a retail store and can't find liability insurance expenses. Unless you know that every store should have such insurance, how would you notice its absence. That's why it really beneficial to use help of a person who knows the industry. If you personally don't know anyone, not to worry. You may hire a business broker to assist you with reviewing the documentation and, possibly, with due diligence. It's worth every penny you'll spend on such service and may protect you from investing thousands of dollars in worthless enterprise.

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Guest Sunday, 20 August 2017