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Common mistakes made by business buyers

Not Giving Dollars

If you're considering buying a business be careful to avoid mistakes which are frequently made by novice buyers:

Failing to understand that the buyer will need to make a significant equity contribution to the purchase. We often get inquiries from people with no cash and precious little equity in collateral assets. Some make the mistaken assumption that an acquisition can be 100% financed.

If a business owner is selling a profitable business with adequate cash flow they will not offer seller financing for the total asking price. 

Overreliance on friends, relatives and 'high wealth' partners. Friends, relatives, and other high-wealth individuals often say they will conjure up a down payment, perhaps even saying they want to become business partners with the buyer.

But it has been my experience that these 'investors/partners' seldom come through when it's time to write the check. I advise buyers to open an escrow account, into which they should ask their investors to deposit their investment before the search for a business begins.

The release of funds will be subject to approval of the purchased business by all investors. Once equity funds are set aside and formally committed, sellers will take buyers much more seriously.

Unreasonable expectations about the business the inquirer can afford. A buyer with $100,000 cash to infuse into a transaction should generally not be inquiring about a company with $3m or more in annual cash flows.

Buyers should seek professional advice about their finances, their expectations and what they can expect to pay for a business before making inquires about businesses for sale.

Failure to be 'identity transparent' to the seller. Most business sellers strive to keep their business sale confidential. Some inquirers are hesitant about disclosing whether the inquiry is on their own behalf or on behalf of a corporate buyer or private equity group.

Buyers should ideally disclose the nature of their inquiry at the very outset. It saves time and helps build trust for any subsequent sales process.

Failure to demonstrate financial capability at the outset. Disclosing your financial capabilities from the start, contrary to popular belief, does not compromise you in negotiations. Demonstrating the financial wherewithal to pay more doesn't mean that the buyer will have to pay more.

Why? Most sellers surmise that it's preferable to deal with affluent buyers, not because they can extract more money from them but because they'll have more faith in the buyer's ability to fund and close the deal.

Why would the seller disclose their confidential financial information to a buyer who has not proved their ability to buy the business?

Failure to recognize the need to personally guarantee acquisition loans. Some 'investors' in smaller and mid-market businesses often think they can borrow money from commercial lenders without personally guaranteeing the loans.

This does happen occasionally (especially for mezzanine funding), but buyers should be prepared to sign personally to make a deal happen.


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