Business

Mistakes to Avoid When Buying a Business: Insights from Chelsea Corporate

News TeamMarch 27, 2023393 Comments01.8k

The excitement of buying a business can be tempered by the challenge it presents.

There are so many factors to consider and there’s always the risk of making costly mistakes. To help buyers make informed decisions, Chelsea Corporate has compiled a list of the five most common mistakes made when looking to buy a business in the UK.

With this guidance, prospective buyers should have no trouble navigating through their purchase with confidence and success.

1 – First Impression Failures

Prejudice – During the initial phase, having any kind of prejudice about the seller can seriously impact your ability to buy a business. It’s easy to assume that the business is up for sale due to a lack of coherent leadership or a business plan – however, taking the time to understand the seller, their journey and their struggles is a great way of ensuring a good relationship through the process.
Giving Business Advice – If you’re buying a business that is struggling, it can be all too easy to assume you know everything and give out business advice. Patronising advice at this stage can seriously impact the success of your business acquisition.
Focus Only On Their Motivation to Sell – When you’re making a first impression, it’s important to connect with the seller as a person, rather than rushing straight into why they are selling the business. Take the time to get to know them, and understand the struggles they’ve faced to get the business where it is today.
Don’t Focus On Price – If you dive straight into the price of the business at this stage, you’re devaluing their years of hard work. Whether you’re buying a competing business or expanding into a new market, don’t instantly start talking about price – and certainly don’t focus the entire initial discussion on the price of the business.

Remember, it’s rare that you’ll meet a business seller who hasn’t put time, money and effort into building the business that you’re looking to acquire. Be prepared to answer their questions, talk through their journey and be ready to answer questions of your own.

2 – Due Diligence Failures

Due diligence is an extremely important part of the business acquisition process, whether you’re buying an off-market business or one which has been for sale for a little while.

Don’t Let A Drop In Turnover Turn You Off – Businesses go through ebbs and flows, so don’t be too worried if you come across a drop in turnover. It could be something as simple as the season or the economy – take the time to understand both before making any decisions.
However, Don’t Discount Cash Flow Problems – Struggling businesses often have poor cash flow, but this doesn’t necessarily mean they’re beyond help. Cash flow issues can be resolved with the right financial advice, so make sure you don’t completely ignore red flags when it comes to cash flow, but don’t instantly let them put you off either.
Find Any Contingent Liabilities – One of the most common mistakes buyers make is not finding out about any contingent liabilities that they may need to pay in order to acquire a business. These could include such things as debts, loans or even intellectual property rights. Any good due diligence process should uncover these before you commit to buying the businesses.

3 – Share Purchase Agreement (SPA) Failures

First of all, remember that negotiations don’t stop at the heads of term stage. Once you enter into a share purchase agreement, there are still plenty of negotiations to be had, and it’s important that you don’t forget this.

Read The Whole Agreement – Many buyers often only partially read the share purchase agreement, which is one of the biggest mistakes you can make. The SPA contains a lot of intricate details that need to be considered before signing off on anything.
Buyers Don’t Partner With An M&A Specialist Lawyer – A specialist mergers and acquisitions lawyer can really help when it comes to understanding the details of a SPA, as well as negotiating any additional terms you may need. Don’t make the mistake of not enlisting a specialist lawyer, who is experienced in the complexities of M&A deals.
Don’t Overlook Environmental Liabilities – A common issue often overlooked in SPAs is environmental liability. Make sure you understand the risks associated with any business you’re looking to acquire, and outline this in your agreement as part of your due diligence process.
Review Agreements In Context – Bear in mind that agreements are always read in context. Make sure you understand the market and what is likely to be expected of both parties before signing off on anything – particularly if you’re buying an off-market business.

Who Are Chelsea Corporate?

Chelsea Corporate are a specialist provider of business acquisitions services, including off-market business research, due diligence and more. As specialist business brokers in the UK, the US and elsewhere in the world, Chelsea Corporate understands the process of acquiring a business and can help guide buyers through it.

“Part of what we do is ensure that the advisors are doing the right things at the right time, ensuring that the deal stays on track and completes as and when it should.” Says Alan Shala, Associate Director of Chelsea Corporate. All our services are tailored to each client’s individual requirements, so you can be sure you’re getting the best advice for your specific needs.