No one ever purchases a new business thinking it’s a bad deal. Entrepreneurs invest because they believe their investments will lead to profits, but that’s not always what happens. Sometimes investors never recover from mistakes made during the due diligence and closing process. A business acquisition attorney can help you avoid these common mistakes.
Overestimating Growth Potential
The seller naturally wants to sell his or her business for the highest amount you’re willing to pay. They may create scenarios that show the potential for profit under the very best circumstances, but it’s not a perfect world. A buyer can be tempted to believe inflated forecasts, thinking of the money to be made and pay more than the business is worth or buy a business that won’t work for them at all.
Analyze both cash flow and profit. Buying a business often involves taking on substantial debt, and the money required to close is different from the cash you’ll need daily to keep the business running. If the business sees a monthly profit but it’s tied up in accounts receivables, will you have enough cash to keep the lights on and the work moving? Work with your commercial transaction attorney to examine working capital needs and understand the business’ cash-conversion cycle.
Rushing Due Diligence
This part of the process is time-consuming and complex. No matter how the deal is structured, it’s important to know exactly what you’re getting. If there are hidden liabilities, unpaid taxes, or new competitors moving into the area, you need to know.
Often the buyer and seller are each trying to run businesses during the due diligence process. It can be frustrating trying to coordinate schedules and exchange the necessary documents and communication. Buyers sometimes become impatient and take shortcuts that can result in financial disaster. During due diligence, you need to know everything about revenue streams, the existing market, the business’s online presence, physical assets, required insurance coverage, and more.
Buying a Culture That Doesn’t Fit
If the business you’re buying is the top provider in the nation for its products or services, but the company values and employee culture are different from your own, it’s not a smart buy. Sometimes buyers are so focused on the financials they don’t get to know the employees who make the business run smoothly. Company culture doesn’t take on the new owner’s personality at closing. Significant differences in management styles can result in you owning a business with no employees.
Hiring a Business Transaction Lawyer
A from Bennett, Weston, LaJone & Turner, P.C. can handle due diligence and negotiations to help you avoid mistakes. He or she will thoroughly research the business you’re considering, so you have all the facts and uncover any risks. Your attorney will work with tax experts to protect your interests and ensure the transaction meets local, state, and federal requirements, helping you navigate the complexities of business acquisitions.