4 Reasons not to Buy a Business.
And, why is this business being sold? One of the first questions that a buyer of a business asks his broker is “and why is it sold?” However today, to paddle a bit against the current, I will present what I consider to be the 4 common underlying reasons for not buying a business. Let’s see.
First. The company is not ready for sale.
The owner of the company experiences losses and wants to sell but is not really prepared for that moment. Consequently, he has not kept his accounting and administrative books in accordance with universally accepted standards; it has not kept its business assets and equipment in good operating condition; has not satisfied the payment of taxes and other fees to public entities; owes important amounts to suppliers…
This neglectful scenario is an obvious disincentive for any potential buyer to be present.
Second. Obsolescence caught the entrepreneur “moved out of the base.”
The owner has not been able to interpret the signs of change in the market in which he works. Cases such as video and CD sales (Blockbuster); photo development stores (Kodak); printing of newspapers, maps, encyclopedias, dictionaries and telephone booklets; fixed telephone lines, long distance telephony and public telephony; and the sale of fax machines have left more than one unsuspecting businessman in the lurch. In these cases, it is difficult for any prospect to even present reasons to evaluate a possibility of an acquisition.
Third. The bulk of the clientele speaks a language that the Buyer does not speak.
There are daring entrepreneurs who venture to acquire a business without knowing the cultural patterns of the clientele that they are inheriting from the previous administration. In these cases, the few who manage to prevail in this difficult environment do so at the cost of immense sacrifices that chronically drain a large amount of their emotional energy. It is not worth venturing into these types of companies if there are other more reasonable alternatives.
Fourth. The company depends heavily on one or a few people who dominate the “Know How”.
The target-business is doing well, shows excellent financial results and is managed with good judgment. However, while we carried out the analysis prior to the purchase, we noticed that the technology or specialized knowledge required by the company is monopolized by one of the employees. This circumstance should trigger a warning flag since our future success could always depend on that person.
Before buying, therefore, we must evaluate if there is availability in the market of individuals that can replace these key employees. The formula that many entrepreneurs use to cope with this problem is to have the prospect sign a service contract or even incorporate him as a partner. However, in both cases, it is difficult for the owner to get rid of a contracted employee or, even worse, a partner when the administration considers it convenient.
Conclusions.
For all the above, and to avoid unpleasant surprises, when buying a company, it is a must to carry out the preliminary steps of examination of the accounting books, its operating licenses, market position, lease agreement, legal actions ongoing or imminent, the status of the clientele and suppliers, among other revisions of interest.
It is a common practice for Florida business brokers to monitor the different stages of the buying and selling process so that the operation can be closed in a harmonious and balanced manner for the parties.
And, although I usually trust people, when buying a business, it is good to take into account this reflection of Napoleon Bonaparte: “In the business of life it is not faith that saves, but distrust.”
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Author: Alfredo Gonzalez I www.negociosenflorida.com
