Avoid These Five Mistakes in Buying a
Business
By: Susan E.
Wells, Esq., Jaburg &
Wilk, P.C.
Five Mistakes to Avoid When Buying a Business:
1. Failure to verify all
data. Most buyers accept all the information and
data given to them by the seller at face value, without
verification. Thorough due diligence is
critical.
2. Buying on price.
Buyers don't typically take into account return on investment
(ROI). If you are going to invest $200,000 in a business that
returns a five-percent net, you may be better off investing in
stocks and commodities or putting your money in municipal bonds or
your local bank.
3. Cash shortage. Some
buyers use all their cash for the down payment on the business,
though cash management in the startup phase of any business, new or
existing, is fundamental to short-term success. They fail to
predict future cash flow and possible contingencies that might
require more capital. Further, there has to be some revenue
set aside for building the business via marketing and public
relations efforts. If you have $500,000 to invest, make sure
you don't invest the entire amount. Although figures vary
from industry to industry, a common contingency amount is
10%. You should also set funds aside for working capital
-typically enough to cover three months' of expenses.
4. Heavy payment
schedules. Buyers often overestimate their revenue
during the first year and take on unduly large payments to finance
the purchase. Generally, however, revenue rarely pans
out. During the first year of any operation, the owner
experiences numerous non-recurring costs such as equipment
failures, employee turnover, etc. It makes sense to have a
payment schedule that begins fairly light, then gets progressively
heavier.
5. Buying all the
receivables. Although it generally makes good sense
to buy the seller's receivables, receivables that are 90+ days are
frequently uncollectible at par, if at all. Preferable
alternatives include:
• Not buying 90+
accounts receivable and paying the seller any amounts that are
collected, if and as they are collected
• Severely
discounting 90+ accounts receivable
• Offsetting
uncollected accounts receivables against the deferred purchase
price
If you spend time reviewing the deal, performing independent due
diligence and making sure that you have enough cash reserves to
finance the purchase and the first year's operations, you will
avoid potential pitfalls position your business for success.
About the author: Susan
E. Wells is a partner at the Phoenix law firm of
Jaburg
Wilk. Her corporate and business practice
encompasses all aspects of
business transactions and commercial relationships in
numerous industries, including franchising
. She has extensive experience representing both buyers
and sellers. Susan can be reached at 602.248.1034 or sew@jaburgwilk.com
.
This article is not intended to provide legal
advice. This article only covers United States Law.
Always consult an attorney for legal advice for your particular
situation.
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