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Buying or Selling a Small Business is Risky Business

The sobering reality is that 30% to 50% of the buyers who purchase a small business fail within three years of the closing. I am frequently contacted by a business owner looking to sell, only to learn they recently acquired the business and now need to bail out or file for bankruptcy. Over the last thirty years I have witnessed dozens of business owners sell their business as a “do-it-yourself project” only to have it blow up in their face costing themselves hundreds of thousands of dollars in addition to months and months of trying litigation.

risky business

photo credit: Paxson Woelber via photopin cc

How would otherwise intelligent successful people end up in such a nightmare scenario? Universally I find one source for these failed transactions it is as simple, and as complex, as ignorance. They simply don’t know what they don’t know and choose to move forward blindly. How then have over 98% of the hundreds of clients and customers I’ve worked with beaten the odds and enjoyed a financially rewarding and personally satisfying experience when buying or selling a business? Because they are informed!

The more you now about the process the better, do your homework, speak with folks that have been through the process, read everything you can find, ask for professional experienced assistance. Learn to recognize the difference between a snake oil salesman and truly proficient advisors.

Considering selling your business?

Understand you will only sell the business once; you have one chance to get it right. The selling process will be a frustrating and emotional experience. In today’s highly litigious society a sale is not something you should take lightly and is not project undertaken without a complete understanding of the process.

You should:

  • Always be candid and truthful stick to fact not conjecture avoid projections.
  • Maintain confidentiality protect your business.
  • Prepare documentation and ready business for successful due diligence.
  • Determine a defendable market value and be prepared to rationally justify price.
  • Predetermine terms and conditions allocation, familiarization/training, and non-compete.
  • Analyze and understand the tax consequences of likely negotiated transaction terms.
  • Develop an understanding of the likely buyer and how they view your business.
  • Use non-disclosure agreements and always prequalify prospects. Never “wing it” ask someone who has been there.

Considering buying a small business?

Buying a business can be a financially rewarding and personally satisfying experience or a nightmare depending upon how the transaction is handled. The better informed you are the more likely you are to succeed. Owning your own business can be the “American dream”, understand however that small business ownership requires harder work and consumes longer hours than you will ever invest in a normal career; you must be prepared to commit to a fundamental lifestyle change. The purchase of a business is unlike any purchase you have ever made. You are investing in an intangible asset, recognizing this and understanding how to evaluate and value the asset is essential.

You should:

  • Keep an open mind the perfect business exists only in dreams.
  • Evaluate your motivation, experiences, background, experience, and skills.
  • Assess your personal and professional strengths and your weaknesses.
  • Understand the financial reality, know your financial capability, and be realistic.
  • Have unwavering support of your spouse and family.
  • Have investment funds liquid and readily available.
  • Do your own research and fully understand potential businesses.
  • Completely understand the business financials and get qualified assistance.

Successfully applying good old fashion common sense to the process, is the single biggest factor in successfully buying or selling a small business, don’t believe everything you hear, do your own research.

About the Author: Mark Doran is President of Choice Business Opportunities Ltd., business brokers located in Denver, Colorado. Mark has over 29 years of experience buying and selling small businesses.

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This article is one of the excellent contributions from small business owners, decision makers and professionals.

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  • Christine,

    I agree – you need to have the right reason when buying or selling a business. It’s pretty much like starting a business: You need to start one with the right reason. Otherwise, you are just wasting your money…

  • Christine Steffensen

    Researching is important on both buying and selling. You have to know selling your business is for a good cause, and that buying a business is good enough for your cause. Thank you for this post.

  • logistico

    Buying business pops up in my mind last year. But I was not too careless to realize how dangerous is it. It is possible that there are so many harsh responsibility to do, after buying. Establish franchise maybe is a better idea. Thanks for sharing.