Buying a business: the biggest mistakes and how to prevent them

There’s no skirting around it: buying a business is complicated. If you’re inexperienced or entering into a purchase for the first time, you could quite easily fall into some familiar traps. Scouring the market for potential investment opportunities can be a thrilling experience, but before you jump feet-first into what’s available, it would be wise to do some careful research, thinking and planning. In this post, we will share five common mistakes buyers make when buying a business, and how to avoid them.

The biggest pitfalls when buying an existing business

As business brokers for the sale and purchase of businesses, we get calls most weeks from excited prospective buyers wanting to know what’s on the market within their budget. Purchasing a business requires careful thought and planning, and it’s clear when a buyer hasn’t done any of this. If you can’t answer some basic questions, then you’re wasting your own time as well as ours.

We’ve pooled our knowledge and experience of brokering business sales to compile the most common mistakes even the most experienced buyers make, and how to prevent them becoming an issue in the first place.

Being unsure what kind of business you want to buy

Before you start searching the market, you need to do your research. You cannot brief a broker to source businesses for sale if you don’t have a clear idea of the criteria you’re searching for.

You can prepare well by being specific and clear about the type of business you want to buy. By the time you pick up the phone to a broker, you should have a clear idea about the type, size, turnover and price bracket of business you’re looking for, and the reasons behind your choices. You should also be able to explain what you don’t want from a business purchase. Read more in this post on where to start when buying a business. Clarity around deal structure and how you are funding the purchase is also an advantage. More on that below.

When you know what kind of business you’re looking to buy, then you can go ahead and register on business sale websites and/or contact a business broker.

Lack of sector knowledge

Buyers with previous experience in the sector they are buying in have an obvious advantage. If you have no prior knowledge of the sector, you should do your research before entering into discussions with the vendor.

When you’ve settled on the sector of business you want to buy, consider the benefits and risks of running a business in that area. Think about legal restrictions, governance, permits and certifications required, and all the external factors that may affect business operations.

If you’re looking to purchase as an investment where you would have strategic control over your acquisition, but an existing employee team will continue to operate the business on a day-to-day basis, you may feel this background research is not quite so essential. You can compensate by choosing a business broker with knowledge and experience of buying and selling businesses in that particular sector. A good level of sector knowledge is invaluable, especially when it comes to negotiating the deal.

Failure to secure appropriate funding

Most people cannot buy a business without access to finance, so speak to your personal banker and commercial lenders about how to fund your purchase. A personal banker may be able to access preferential rates based on your customer profile, while a commercial lender has the tools to search the whole of the market for the best rates. It’s then up to you to make sure the numbers stack up and decide which option is both suitable and affordable.

In our experience, every financial institution prioritises different criteria (banks are businesses and need to have a balanced lending portfolio). Some won’t touch certain sectors of business, so it’s worthwhile doing the research upfront before you start your search to buy. You will lose credibility if your lender declines to fund the purchase after you’ve verbally agreed a deal.

It’s not unusual for a vendor to choose a buyer based on access to funding, especially if they are looking for a quick sale. Buyers who have their funding organised, approved and ready to go are always considered more favourably.

Buyer complacency

It would be easy to put your feet up and let your broker or solicitor get on with due diligence once your offer has been accepted. But this is the time when you really need to stay alert and on top of things.

Be proactive in managing your professional team and advisers. Be demanding when it comes to timeframes and keeping everything on track. Chase information, ask for updates and make sure all parties keep their promises. The deal needs your focus and drive to push it to the point of completion. Its success relies on your refusal to be complacent.

Lack of rapport with your vendor

Establishing a good relationship with the person whose business you are buying is essential for a smooth and successful purchase. Any breakdown in communication could put a strain on proceedings and be a red flag to the vendor and their representatives.

This is the time to put any personality differences aside and be open to getting to know the owner you are buying from. Show respect for the business they have built and what they have achieved. In the long run you stand to benefit from their success.

It’s fine to disagree when negotiating. Honesty will help move the deal forwards. Questioning the vendor is fine, but never criticise their actions or decisions. They don’t have to sell you their business, and you weren’t there at the time. Animosity will only slow progress.

Where to find support when buying a business

With careful research, thoughtful consideration and respect for the vendor, the process of buying a business can be smooth and straightforward. Drawing on the experience of a business broker can prevent even the most adept buyer falling into common traps and ensure your purchase is a lucrative investment opportunity.

Contact your local business broker to access expert guidance and support, whether it’s your first or tenth business acquisition. We search the market, match buyers with vendors, and guide you through every stage of your purchase.