Four Big Mistakes to Avoid if You’re Buying a Business

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If you’re thinking about becoming an entrepreneur, you may be wondering whether you’d be more successful starting a business or buying an established business.

“‘Start your own business, open your own shop’ has always been part of the American dream,” observes Josh Tolley, nationally syndicated talk show host and author of the recently published Acquisitional Wealth.

“Sadly, few people pay enough attention to statistics that show approximately 50% of start-ups fail within five years. However, if a business remains open for a decade, the odds are that it will survive and has the potential to be marketable. So, if you have the option of investing in a new business or buying a well-established, going concern, just think of the hassle, worry and grief that can be avoided. But you’ve got to go about it the right way, realize the importance of having your own support team, and don’t even dream of doing it alone!”

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In recent years, a number of our clients have run their business ideas by my staff — ideas and schemes, as Tolley correctly points out, “that often (stem) from a growing social media presence of insta-experts and coaches who sell do-it-yourself, expensive ‘how to buy a business’ courses, along with a list of several self-named resources that are available to buy now from their websites.

“Very much like the stock market mania of the COVID years, otherwise sober, mature adults act more like high school kids infatuated with their first love. This is where the failure to have competent, professional help and guidance can prove costly,” he says.

I asked Tolley to set out some of the most glaring mistakes anyone wanting to buy a business can make.

1. Follow the wrong advice and think you can do it on your own.

So many people are trying to go it alone, following the advice of an online business coach who says, “I can guide you in buying an ongoing business, so why pay for a lawyer or an accountant?”

The result is an epidemic of financial and legal problems. If you are buying a business, definitely use the experience of a broker, a transactional attorney and, if applicable, an accountant familiar with the dynamics of the enterprise. “It's going to save you years of headaches, stress and possible legal ramifications to the business,” Tolley notes.

2. Buy retail or income-producing property.

The second most frequent mistake is getting into either retail or income-producing real estate. Tolley underscores, “Retail is not where you want to start, and you must accept the fact that there is a lot of unstable ground when it comes to retail. Restaurants are retail. Anything can upset the apple cart, from a pandemic to even construction on the road in front of the business/restaurant you just purchased.”

He makes a strong case in his book: “Make sure that you are purchasing a business that is not dependent on retail conditions, but instead depends on market or B2B (business-to-business) conditions.”

3. Think you’re going to be successful without going all in.

Contrary to other endeavors in life, if you're going to acquire a business, jump in entirely or don't jump in. “Once you have acquired a business,” Tolley points out, “you have to commit and really go for it. So often, I’ve seen the results of ‘entrepreneurs’ who tried to continue working their regular job. A variant of that mental process thinks, ‘Well, we saved $200,000 for a down payment, so let's try $50,000 down to just give it a taste.’ That never works out.”

4. Change your team of advisers during the process.

“Don't listen to your friends who might have owned one business once or who have no experience at all,” Tolley cautions. “This isn't a time to get a consensus from friends and family. Unless they've done this successfully, their opinions don't really carry a whole lot of weight. As many first-time buyers don't come from a business background, their friends and family tend to have a similar lack of experience, and so their advice may lead down incorrect paths.”

How to prepare to buy a business

Before buying a business, you have to prepare financially by:

Keeping your credit score high
Not incurring any unnecessary new debt, such as a new car
Postponing any sort of credit hit until after the purchase
Ensuring your tax records are clean and up-to-date

Concluding our interview, Tolley shared a prescription for a successful business purchase by someone who has never before owned or operated a business: Start learning as many business skills and acquiring as much practical business knowledge as you can, rather than focusing on specific industry capabilities.

“Your overall business skill set is going to serve you much better in acquiring the company and running it successfully,” he says. “For example, with a restaurant, how to manage employees is going to serve you better than mastering a risotto recipe. Related and important skills will come with the business; knowing how to drive the business — like learning how to not just drive a car but race it and win — is now your goal.”

Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, You and the Law. Through his column, he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift."