The one common denominator that most millionaires have is that they own their own business. Owning your own business can be a very financially rewarding experience. The thrill of being the boss and having complete control over your own destiny are the primary reasons people leave the work force to operate their own company. Owning your own business can easily turn in to a nightmare if you make mistakes. These mistakes are avoidable if you know what to look for in the business. You have a better chance of becoming a millionaire if you avoid these 5 major mistakes when buying a business.
1. Due Diligence, Due Diligence, Due Diligence
Not everything is as it seems and that is especially true when buying a business. The owner can produce financial statements that show a business is thriving. You need to do due diligence to make sure the information presented to you is valid and shows an accurate picture of the condition of the business.
You want to make sure you know what items the business actually owns, what is leased, what is owed to the business and what the business owes to others. You do not want to buy a business only to find out there is a huge pile of bills that are due and the income you were expecting does not materialize. Doing a solid job of due diligence will help you avoid buying the wrong business or paying too much for the business.
2. Not Having Enough Cash Reserves
Running a business requires capital. Successful businesses are able to generate enough revenue to cover the cost of their expenses. In times when the revenue is less than the expenses then you need cash reserves to cover the shortfall. If you spend all your money in the acquisition of the company then you will not be able to cover shortages when they occur. This can be the quickest way to bankrupt your new business. Do not buy a business until you have the necessary funds to both buy the business and the necessary funds to keep it open after the purchase.
3. Assuming Cash Flow will Cover Debt
There will always be a transition period when buying a new business. Some vendors will have a loyalty to the seller and will pull their business when management changes. Likewise you might lose some of your buyers after the transition. These changes are unavoidable. They can have a tremendous impact on the cash flow of your business. If you purchase a business assuming the current cash flow will cover the payment on your debt, then you might be in for a rude awakening.
4. Paying for Potential
Sellers will try to set a price on a business based on the projected value of the business. For example a self-storage business that is 40% occupied at the time of purchase may be worth $1 million dollars. If the occupancy rate was 80% then the value of the business might increase to $2 million dollars. You should not pay $2 million for the business because the seller entices you on the future potential of the business.
It will be your time, effort and energy that create the future potential in the business. You should be awarded for your efforts. Do not make the mistake of over paying for a business and rewarding the seller for your hard work. The value of the business should be based on the condition at the time that you purchase it.
5. Wrong Entity Structure
The worst mistake that you can make is to buy a business using the wrong entity structure. First time business owners will buy a business and sign every contract in their name. This is a major mistake because it makes you personally liable for any loss that the business incurs. If there is loss your creditors will go after your home, your car, and your savings. Buying a business using an entity structure such as a corporation or a LLC can minimize your personal risk. Use an attorney and an accountant to help determine what the best entity structure for you to use is. Do not make the mistake of putting everything you own at risk when you buy a business.
Owning your own business can be the quickest path to becoming a millionaire but you may never reach that goal if you don’t avoid these 5 major mistakes when buying a business.