Business schools are known for churning out large numbers of budding entrepreneurs. But the problem is that starting your own company isn’t nearly as glamorous as you might hope, and all the theory in the world can’t prepare you for the stressful realities of buying a business. Many people do not understand how incredibly complex buying—let alone running—a small business can be. Here are the most common mistakes we see among first-time buyers.
Assuming Finding a Good Business for Sale is Easy
Vetting and finding the right company can take one to two years. The data suggests that you’ll need to review 100 teasers, perform preliminary due diligence on 15 targets, and sign anywhere from 2 to 4 letters of intent before closing the deal. Many entrepreneurs quit before the process is finished because they never fully contemplated why they are doing this or what their goal is. They fail to appreciate the complexity of the process, and therefore neither plan ahead nor seek sufficient support from experts.
Not Understanding the Seller
Empathy can get you ahead in the world of M&A because it allows you to put yourself in the mind of the other party. Business owners have deep attachments to their companies. During the first meeting, spend at least twice as much time listening as talking so you can understand why the owner wants to sell, listen for hidden motives, and assess their credibility. Be yourself so you can nurture a meaningful connection. Then continually revisit the key question of why the seller really wants to sell.
Not Understanding Fundamental Profit Drivers
If you want to buy and run a successful business, you must understand how the business makes money. That seems obvious, but sellers do a lot to make businesses look enticing on paper without giving much detail. You need to dig deeply into the financials to understand exactly what is happening with the business, as well as the broader picture of the industry it operates. How does the business compare to its competitors? Is it doing anything different? Why this business instead of a competitor in the same industry, or a similar company in a totally different niche? The core component of this is an exhaustive due diligence process, guided by an expert.
Doing Due Diligence Remotely
Don’t blindly rely on reports and third-party data. When conducting due diligence, you must verify everything. Act like a detective. Use different data sources, check the math, and verify each figure with other data. You must get into the field, visiting the business in person so you can see what daily life looks like. And always adopt the mantra “no numbers, no deal.” Sellers always want to give as little information as possible. Don’t let them get away with it.
Overestimating the Business’s Value
It’s easy for first-time buyers to fall for slick marketing and personable executives. Don’t let the stars in your eyes cloud your vision. Valuation is an art, not a science, and there is no single objective measure of value. So don’t just rely on what the first valuation expert tells you. Look deeper, paying attention to how value has changed over time, and the extent to which today’s drivers of value might change. For example, is the business excessively dependent on its owner? On a charismatic sales team who might leave? What effect might your taking ownership of the business have on its value, and is a value increase or decrease more likely?
About Vision Point Capital
For over 20 years, our team has supported our clients with comprehensive advisory services to help them with their complex business valuation and transition needs. Few other firms offer such a complete suite of business transition services as it relates to M&A, Valuation, and ESOPs.
Our client’s personal goals are at the heart of everything we do. We are well versed in advising clients across a broad range of industries and help them manage and navigate valuation and all the business transition alternatives available to them. In fact, when you work with Vision Point Capital, you leverage our resources, experience, and expertise to help you grow faster and optimize value for reaching a successful business transition.