There are few decisions in life that are as important as buying business. Think about it! You are getting ready to bet your life savings on it. Not only that, but you are betting your future on it too. The decision not only affects you, but everyone around you, especially your family and friends. You will pay the price for any mistake you make at this point for a long time.
It is easy to make wrong decisions during the buying process, particularly after you become too involved, and get frustrated by the slow pace of progress. You just want to get it done and start working on the future rather than continue “wasting” your time. This is when you are likely to make wrong decisions and regret them afterwards. I always like to lay out few principles that I can go back to when this type of situation arises, so that I can keep myself in the check. The 5 mantras I have described below are meant to guide potential buyer during the buying process and help make the right decision.
- Buy low, sell high – Is this even worth mentioning? After all, who in his right mind wants to pay high? And yet, you will be surprised how often people overpay by buying the business at the peak or getting too emotionally attached to it. We need to follow Warren Buffet on this matter. He advises to always keep a margin of safety when buying stocks or businesses. He has famously said – “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” You do not want to buy the business that is at the peak because you will be paying high price and there may not be enough room to take it higher up.
- Leave emotions at the door – Emotions have no room in business decision making. Just because you love the products doesn’t mean that the business will necessarily be equally good. There is a difference between the two. Emotions will lead you to make wrong decisions and can make you to overpay. The best decisions in business are made with rational mind rather than emotional one.
- Seek expert opinion – While it is easy to advise not to make emotional decisions, it is difficult to follow in reality. After all, human beings are emotional by nature. That is why it is important to ask others, who are not as emotionally attached to the outcome, for their opinion. It helps you balance your biased opinion with the neutral feedback from those who are not too close to the situation. Besides, it is impossible for any one person to know all the answers and understand fine points of business. Getting opinion from key advisors such as accountants, attorneys and others helps you uncover and overcome hidden pitfalls during the buying process.
- Do not rush – As I mentioned earlier buying a business is probably the most important decision of your life. You cannot afford to go wrong and that’s why it is important to take time before making the decision. Trying to rush through the process leads you to make wrong decision or overpay. You need to use the time wisely to perform proper due diligence and ask questions that will help you with the decision making.
- Perform the field work – While financial due diligence is key part of business buying process, equally important is the due diligence that involves other aspects of the business. After all, the numbers can only tell you so much about the business. As we all know, small business sellers are notorious for “massaging” them. You have to talk to the customers, competitors, suppliers and anyone else dealing with the business to get a true sense of how the business is doing. Look at this article that describes how to evaluate the business.
What principles do you have when buying a business?
It’s tough in practice to know if a business is available at a peak or a low price.