Tuesday, February 14, 2012

The One Biggest Mistake When Buying A Business

So what are you buying when you purchase a business?
In a nutshell - future profits!
The biggest mistake that I see is that the purchasing decision is an emotional decision to most, not a rational one.
Of course, there are many reasons why people purchase a business:
* freedom
* lifestyle change
* escape the boss
are amongst many reasons given.
However, we see many businesses for sale at a price that is not supported by past performance. In many cases, potential purchasers look simply at the sales achieved and not what the business is really making, after allowance for a reasonable wage.
It's our obligation as advisers to a purchaser to ensure we bring a rational head into the assessment process - very confronting to the purchaser who is irrationally considering the purchase by the heart.
I am currently working through a purchase proposal to purchase a segment of a business where:
* there are no specific financial reports for this segment
* the valuation methodology adopted by the accountant for the vendor is at best questionable
* the financial projections provided are unable to be verified as a fair indication of the past
* the proposal is to purchase into an existing company
Now, the rational purchaser would consider all these factors and most likely pass over the opportunity
However, my client is still seriously looking at supporting the purchase. An emotional decision indeed!

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