11 Mistakes to Avoid When Buying Businesses

So I've bought and sold over 20 businesses, and I've looked at thousands more of all different sizes, from little tiny startups to gigantic multi-hundred million dollar corporations and everything in between. Everything from Main Street to tech and all the different stuff there. I've seen people tend to make the same 10 or 11 mistakes over and over again when they look at buying a business. I also have a podcast. It's called Acquisitions Anonymous. We look at businesses for sale, usually 2, 3, 4 a week, and it gives me a unique perspective to tell you about the types of mistakes that I see that people either make or could make as a first-time business buyer. Mistake number 1 that I see is buying yourself a job. Now, what buying yourself a job means is that there are some businesses that the owner has to work in the business in order for the business to succeed. So, for example, one of the businesses we looked at was a business that would build like the booths for trade shows and support the customers that own those booths. Right. And they would store them, they would build them, they would deploy them, all that kind of stuff. But when we dug into the business, what we discovered was the CEO of that business had to own those relationships with the customers. Otherwise the whole business fell apart. And so what you saw then was a business that if you went to go buy it was a nice multimillion-dollar business. The person was making a really good lifestyle, but ultimately they didn't really have a path where they could ever get out of the business or if they wanted to own a second business someday, they just couldn't do that because they had to be in there and the only the owner could do that job. It trapped them in that thing. You can choose you want to live that lifestyle, But a lot of people, well, they want to take long vacations and eventually retire. And if you buy yourself a job, well, that kind of creates a problem. So mistake number 2 I see people make is they don't ask themselves why they are the lucky buyer. In other words, when you're looking at a business to buy, you ask yourself, well, why do I get to buy this as opposed to all the other people that have maybe looked at it before? And you'll see this often with deals that are for sale that have been on the market for months or maybe years. And it comes to you and you look at it and you're like, hey, this looks great, but you don't slow down. And think about like, why are they coming to me? One time on my podcast, we looked at somebody was selling the franchise rights for a particular franchise concept up in Minneapolis. We asked, well, why are they selling this? And we dug into it and we saw that the person who was selling it was actually a franchisee in another market, and they had bought the rights for Minneapolis, but they weren't developing that market themselves. They were selling those rights to somebody else. And what we also realized was it had been on the market for a while. And that meant that that franchise owner who had bought those rights for Minneapolis had tried to pitch it probably to every single other one of the franchisees around the country, and they had all passed on it. And what was interesting about that is if you ask yourself who knows more about a particular type of business, especially a franchise concept, it's always going to be the franchisees. They're the ones running those business every single day. And that was an immediate red flag for us when we looked at business because we saw that we were the lucky buyer, probably because we were just dumber than all the franchisees. And this wasn't going to be a good opportunity at face value. All right, let's move on to business buying mistake number 3, which totally ties back to, well, the global pandemic that we had due to COVID a few years ago. And what happened to a number of businesses during COVID is they either went way up temporarily or they went way down and performed a lot worse. You think about things like an event planning business, right? Like, if you're going to be planning events, well, you're not going to make any money because all the events were canceled. So another great example there is, well, say you were selling software for virtual events during COVID and suddenly everybody everybody couldn't have in-person events anymore and they could have, you know, the events virtually and they had to have them online from their house. Well, of course that software went like crazy and that was a COVID blip, right? Things went super well during that period of time. And then you have to ask yourself what happens post-COVID? Well, we all saw what happened post-COVID. Everybody rushed back to go to in-person events and try to live their life like the way they did before, which meant if you bought a software business that did really well during COVID well, you couldn't predict that it was gonna do similarly well post-COVID businesses that did incredibly well during COVID tried to go out and sell themselves at the revenue numbers for the COVID environment. And you have to understand what that blip is and don't bet on it continuing as you go and buy that business. It's important to take into account what happened during that phenomenon and how it affected the economy, and then down to how it affects the business, and avoid those COVID blips when you're valuing and choosing what business to buy. The next mistake that I see people often doing when they're buying a business is they get stuck in what I call seller fishing expeditions. So you'll see this often when somebody has listed a business or they've marketed it for a long period of time. The seller thinks they want to sell the business, but they actually really don't. And they're doing a fishing expedition where they're just doing something to either wait for somebody to come in to pay them a ridiculously high amount of money for the business, or they're just wasting your time where they can feel good, uh, talking to you about selling the business. And I've seen stories, for example, where a husband and wife owned a and the wife was insistent to the husband that he sell the business and retire. And the husband was running a process, but he kept torpedoing every time they got close to selling the business. And the business was on the market for years. Uh, and eventually the husband did get sick and they had to sell the business, but he only finally gave in, uh, when he was truly forced to. Before that, he had wasted just a ton of time of all the people that were talking to him about the business, trying to pitch him on selling the business and acquire it from him. And, uh, it was just a huge mistake for everybody who didn't recognize that he was just wasting their time. Let's talk about this next one. I see this mistake a lot. A lot of times you'll go look at a business for sale and it has what I call exploding real estate. And exploding real estate is this idea that your business that you own is dependent upon having a really good location. And you look into the business and you discover that the business actually has a lease where they're leasing that location from the landlord. And the more you dig into it, you'll discover that, oh, 6 months from now, this lease that is a good place and under good terms, that lease is coming up and is going to end soon. And two things can happen when that lease ends. One is the price can go up or you can lose that space to a competitor who comes in and the value of that business, which was solely dependent upon having that really good lease, well, it explodes and it goes away. So that's something you have to really look into. And as a big trap as a business buyer, is the real estate a core component upon what's happening? And how long do I know I can be in that real estate? So when most people go to buy a business, they potentially can run into this next trap, which is around financing. While there's a whole bunch of businesses out there like plumbing businesses, HVAC businesses, a lot of the Main Street businesses, there are a lot of businesses that are just plain not financeable because, well, banks don't want to finance them. You might have a situation in which the business is totally dependent upon one or two clients and the bank can't really predict that you're going to stay in business for the long term because they know if one or both of those clients leaves, well, you don't have a business anymore. And then there's another category of businesses that are unfinanceable, which is some of the unsavory stuff, like good luck trying to get, you know, a strip club, like like, like finance. Like, it's a difficult thing to do because a lot of banks and a lot of investors don't want to deal with that kind of stuff. All those kinds of things that you have to factor in in terms of the dynamic of the business. And as you start to look at businesses, you have to have an eye for, well, how I'm going to put together a deal. Because a lot of times when you buy a business, you're paying 2, 3, 4, 5, 6, 7 times the annual earnings of the business. And most of us, well, when we buy a business, we can't pay all cash. We need to go borrow money to do that. And debt is required in some businesses, well, you just can't finance them at all. So one business that we looked at was Bitcoin ATMs. So I don't know if you followed the, the saga of Bitcoin ATMs, but basically what they do is, is they're ATMs that are in convenience stores or wherever, uh, that allow people to connect and put cash into Bitcoin, uh, and put it on the crypto network. And on the other side, the money transitions out over cryptocurrency. And so people can access their wallets through these ATMs and bridge them to do cash. Well, You know, there's an interesting dynamic there, which is a lot of those have been discovered to be used in money laundering. And so that leads into the next kind of point that, and, and is a danger that people should look out for, is are you buying into a business that potentially has peaked and is gonna go into decline? Because of what's going on with a lot of the regulatory compliance around Bitcoin ATMs and a lot of that kind of stuff, what you're gonna see is the government and folks like that coming after those types of installations much more. And it's gonna be more difficult for the folks that have been using them to use them. So that business is gonna do less business, so it has peaked in terms of demand. And so that really causes you to want to avoid this danger, which is, hey, like, you can get in there and buy a business and this is the best it's ever going to be, and you're going to have to just navigate it on the way down into the decline, uh, and that's just going to hurt your investment returns. Obviously, businesses losing revenue tend to make fewer profits, and that's not going to be as much fun as, well, making more money. All right, so let's talk about this next trap. I call this buyer business fit. So you have a buyer and the buyer is buying a business and you have to ask yourself, am I the right buyer to want to do this? So one time we looked at a ski rental place for sale. So we dug into this particular business. It was a nice business. The owner was making hundreds of thousands of dollars a year, but we had a problem. The business was out in the middle of nowhere, Colorado. And so for you as an owner to want to own that, and let's say you're a buyer who's in New York City or Washington, state or Texas, like you're going to have to figure out a way to be out there in the middle of nowhere and make sure that's the right business for you as you buy that one and try to run it, or at least try to supervise it if you're going to have somebody running it for you. So that's this concept of buyer business fit. Of all the businesses I could buy, I need to make sure the ones I buy are ones that can actually be practical for me to be a good buyer for. Trap number 9. This is called not owning your customer relationships. So a lot of people think, for example, when they sell on Amazon or they sell on eBay, that they have a relationship with their customers. In fact, like when people buy their stuff, like they call it a customer. But the reality is a customer is only somebody that your business can actually reach out and contact and you have a relationship with that person. And the reality is that if you're an Amazon seller, the real customer of your business is Amazon. And then Amazon has its customers. In other words, when I buy on Amazon, I don't go to your website to buy something. If you're an Amazon seller, I go to the Amazon website and buy something and choose from all the potential sellers there. And so that's where I think there's a real misconception. And a trap here is that you have to buy a business and you want to buy a business where you own your customers, or if not, if you don't own your customers and you don't own that relationship, you have to price in that risk that at some point Amazon may decide not to feature you anymore, or the platform may decide that you're not even a good vendor for them. Okay, so here's another trap. Some businesses are just really frickin hard. And there was a great example of a really hard business that we looked at, and it turned out to be a casino in Costa Rica. For the right buyer, that could be an easy business. For the wrong buyer, like a gringo like me from Texas who knows nothing about business in Costa Rica and speaks Spanish like a 5-year-old, it's not a good business to buy because it's just gonna be really freaking hard, right? I don't know anything about that market and all the things that I know about doing business in the United States or in the westernized countries, none of that applies when I go down to a place like Costa Rica. So the trap to avoid here is like, just try to buy something that's going to be easy for you, something that plays to your, your competitive advantage, and try to avoid things that are, well, just going to be super hard. So let's talk about this next trap: high working capital requirements. So working capital is the money that you have to have sitting in your business in order for it to work. So say, for example, you own a business that sells plumbing supplies. Working capital is how much money you're going to have tied up inside of the business, especially owning things like inventory or paying salaries, between the time that you sell something and the time that you get paid. So for For example, if you're going to have to carry a bunch of inventory, that means your business is going to have high working capital requirements, like the supply business I talked about, or the ones, for example, like equipment, equipment rental. Like if you're going to do that, you have a bunch of working capital tied up in inventory and stuff like that. Can be a real danger that people don't think about it when they're evaluating business like that, which is how much money do I need to put into this business as it grows? And when you do that, well, that's money you can't put into your own pocket. And that can potentially be a trap if you don't think about it and model that into the price you're going to pay when you go to buy that business. So that's it. I would give you a plug now for my podcast, Acquisitions Anonymous. We look at small businesses for sale each and every week, sometimes some big businesses, and you can check that out. We'll put the link below and invite you to enjoy it. And so these are the traps I know. If you have something to add to the conversation, comment below. Thanks.