Three Common Mistakes to Avoid When Buying a Business
If being your boss and owning your own business has been a lifelong dream, then take that next step and invest. You should be aware that not all business transactions run smoothly, and you want to have a successful transition and profitable business, so here are a few things you should be aware of when buying a company.
When you buy an existing business, it is referred to as a merger and acquisition. You can use this approach to expand an already established business you own, or you can use it to buy into a company where you have not had previous ownership. Without the proper planning and by not doing your research, you could lose equity with a poor acquisition. These problems could arise because of poor execution of the deal or by not choosing the right business for your needs. This is why having a Maryland business lawyer is a valuable resource.
While countless errors could happen when making a business transaction, many mistakes are more common than others. Here are some tips regarding the common mistakes to avoid during your merger and acquisition:
- Be flexible regarding your plans and preparations – Sticking with the plans no matter what is one error that many people make during the transaction process. Planning for a successful business purchase is extremely important, so you should have plans set up like a roadmap that is flexible so that they can adjust as necessary. But, be prepared to entirely scrap those plans and start over should an unexpected situation arise. As an example, if you are buying a franchise, the existing franchisee will have to get permission to sell the business.
There will be an approval process, and the franchise agreement must be reviewed and worked through carefully. There are searches for liens and litigation and confirming the business is what you think it is and what you expect. Sometimes that means that the closing of the transaction will not be on the planned date, so instead of focusing on a timely closing you should focus on finding out if the deal is still in your best interest. Don’t think you have to go through with the purchase if new information that alarms you is made available before closing.
- Falling victim to the sunk cost fallacy – Sometimes a buyer commits time, effort and money into negotiations to purchase a business, so he or she becomes committed to making that purchase regardless of whatever happens. After an investment has been made, it might be difficult to just walk away. This falls into play with the prior mistake mentioned regarding flexibility. Sometimes it is better to take the loss and walk off.
When you hear the term “sunk costs”, it refers to the money that is already spent. These funds cannot be recovered, so they are sunk costs. It is better to take those losses than to end up losing much more by closing a deal that will not be profitable. As an example, it is much better to lose $10,000 rather than $500,000. If you have these kinds of concerns, talk them over with your Maryland business attorney.
- Failure to set up the right employee incentive plans – The employees of the business play an essential role in the transaction. If some members of management and other key employees are staying on with the firm after you take control, you need to make the right arrangements. Most workers don’t like change, so many employees will put out feelers to decide if they are going to jump ship.
If these employees are essential to your business, you need to work out the right deal to keep them around. There is much more to this than compensation, so consider bonuses, explaining your expectations and management style, and go over the benefits package. Sometimes it is better to do what you can to keep the team that is already there rather than to have to rebuild your team and hire all new management and leaders. Starting from scratch can be stressful to those employees who stay as well.
Planning for Success
When you work to avoid these mistakes, you are working to make sure your business is on track and is ready to be successful and profitable. When you are buying a business, you should work closely with an experienced attorney who is knowledgeable about mergers and acquisitions. For personalized attention with your business transaction in the Baltimore area, call Nemphos Braue Attorneys at Law, a Mid-Atlantic Business/Corporate Boutique Law Firm, at (410) 321-8200 or fill out the form below.