7 Mistakes to Avoid When Buying a Business

One of the best ways to enter an industry or expand your business is through buying a business that is already existing. Sometimes, it is easier to enter into a market through entities that are already thriving there rather than try and start from scratch.

However, the process of buying a business is not simple. If you are not careful, you could make mistakes that render it difficult to close the deal or even worse, cause you to regret after closing it. If your M&A business is in the $2 million — $50 million bracket, you should avoid these top 7 mistakes when buying a business.

Being Inflexible While Buying a Business

Plans fail. No matter how well laid or beautiful they are, they still fail. Let your plans be detailed and precise. However, you should refuse to get hung up on them. Plan for some flexibility so that if things are not exactly going your way, you can adjust to accommodate them.

Too Large Integration Teams

Experienced M&A buyers who are making significant investments often form large teams, some for the negotiation, others for closing and integration stages. Sometimes, it makes more sense to go with smaller teams.

Large teams are unwieldy and may add unnecessary complexity to the deal. For instance, the process of getting due diligence done may become impossible where several people have to interface with each other. Information can fall through the cracks in such instances.

Infrequent Communication

Do not let yourself get pulled in so many directions that you neglect to communicate with the major stakeholders. You should not let this take a back seat. Try to communicate frequently and consistently. Establish an open line to your advisors and the seller. This stabilizes the process and ensures nobody is confused or worried.

Failing to select the right Deal Structure

A lot of the time, the right deal structure is everything. Generally, you can buy a business by purchasing its assets or its stock. Buyers often like to buy the assets while sellers generally prefer to sell the stock.

You should spend a bit more time deciding on the structure though. Sometimes, it makes more sense to buy the stock instead of the assets. Make your decision based on the nature of the business you are buying and its counterparties if any.

Not getting Employee Incentive Plans Right

It may be useful to keep some employees of the business around. Adequate plans should be made for them. If this plan is not mapped out before the deal is closed, the chances that these key employees will accept offers elsewhere increases significantly.

Making Decisions Solely to Keep the Peace

M&A decisions should be based on several considerations. Most important amongst these considerations is the goal that is sought to be achieved through the acquisition process. Avoid making decisions simply to get the deal through. Decide based on what is best for you and your investment.

Not Knowing when to Walk Away

Sometimes, you simply have to walk away. Refuse to succumb to the “sunk cost” mentality. Even if you have spent a lot on the deal, critically assess if it would make sense to spend even more on the deal and run the risk of regretting later or simply walk away.