For many, the American dream of owning a business is in queue

right behind owning a home. I was a teenager when I owned my

first business. Since then I have bought or started many

businesses and helped others do the same. Here are some common

mistakes I have witnessed or committed myself.

Paying too much

This results from the combination of all other mistakes. Many

new business owners set themselves up for failure by paying too

much, which results in higher loan payments, lower operating

funds, and reduced borrowing capacity.

Letting your emotions rule

If you have always dreamed of owning a business, it is very

easy to get caught up in the strong emotions invoked by seeing

those dreams coming true. To counteract your emotions, take

your time, do your homework, and enlist the help of objective

advisors.

Paying for potential

You should only pay for the business as it stands at the date

of purchase, not what it could be in the future. You will have

to spend time, effort, and money to develop its potential. The

seller chose not to invest these things, so he does not deserve

to be paid for them.

Not evaluating yourself

Do you have what it takes to run this business? Try to match

your strengths to the important duties you will be required to

perform. Running a small business requires the owner to do many

things. No one can be good at them all, so make provisions for

those areas in which you are the weakest. Some tasks like

payroll and bookkeeping can easily be contracted to outside

vendors. Possibly your spouse, other family member, or a

partner could do things that you cannot or do not want to do.

Not building a team of experts

At a bare minimum, you should enlist the aid of an attorney and

a CPA. The attorney can prepare and review documents, help

structure the deal, and make you aware of legal and liability

issues. The CPA can provide a financial analysis of the

business, and advise you about tax and accounting matters. You

should consider adding a business valuation professional. His

valuation report can be used to determine the reasonableness of

the asking price, negotiate a lower price, and provide valuable

information about the business, the industry, the competition,

and the economic conditions.

Relying on bad information

You should verify all important information about the business.

Your CPA can check financial information like receivables,

payables, and inventory. Your attorney can review loan

documents, leases, and contracts. Your business valuation

professional can analyze the competition, the industry, and the

economic conditions. Use independent appraisers to value real

estate and equipment. Get a credit report on the business

through your CPA or banker. You can do some of the

investigating yourself to save money, but do not cut too many

corners – it may cost you in the long run.

Changing too much, too fast

Once you own the business, you will be tempted to start making

wholesale changes from day one. You risk alienating long-time

employees and customers. Unless the business is in bad

financial condition and needs immediate action, its better to

take some time to get to know the business, your employees, and

your customers before making changes. This is a perfect time to

solicit suggestions from employees and customers.

Buying a business because you like to do what the business does

One reason restaurants have a high failure rate is people buy

or start them because they like to cook. Very few restaurant

owners spend time cooking. Their time is spent managing staff,

ordering supplies, doing paperwork, and handling daily crises.

A small business owner must wear many hats – including that of

manager.

Not being interested in the business’s product or service

I made the mistake of thinking that because I am a CPA and

smart that I could own and operate any business. I bought a

business that sold high-performance auto parts to young men who

drove jacked-up, four-wheel drive pickup trucks and went to the

drag races every weekend. I did not do either and never

understood why anyone would. I could not relate to my customers

and went out of business in about a year.

Conclusion

Buying a business is a complicated, emotional process. By

avoiding these costly mistakes, you can prevent turning your

dream into a nightmare.