Buying a small business can be stressful, so much that otherwise smart people can do stupid things. With years of experience doing and watching business transactions, I’ve come across some common stupid things that can be avoided.
-Don’t make the business seem more profitable than it is. Of course, the Seller wants to get as much as possible out of the business, so he/she will tell you lots of ways you can cut costs and make more money. The problem is, those are assumptions. While there can be reasons to value a business on potential, for the most part a business should be valued on actual results (50% current year; 50% past two years).
-Be careful to not buy a business that has outlived its potential. Even if it’s fairly valued today, if you don’t see a logical path to grow the business and increase its profit, back away. I once heard a marriage counselor say that a marriage that isn’t growing is dying. I think the same can be said for a business.
-Get everything in writing. OK, I’m a lawyer, I admit I have a bias for contracts, but over the years, I’ve seen too many painful examples of handshakes go bad. This could be a month-long series of blog posts, suffice it to say, that which is written counts and only count on that which is written.
Forrest Gump was right about most things, not the least of which was his line “stupid is as stupid does.” While stupid seems to be a politically incorrect word these days, I use it in this context because common mistakes that can be avoided in my mind fall into the category of “stupid.” In your stress or haste to make a deal, realize it’s easy to do stupid things, so seek out your own Captain Dan that will ask you the hard questions.
Tennessee Valley Group
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