Common mistakes to avoid when buying a ready-made or shelf business – Part 1

Common mistakes to avoid when buying a ready-made or shelf business – Part 1

The first mistake to avoid when buying a ready-made or shelf business is getting too anxious as it will affect the price. Keep in mind that anxiety or impatience is not going to help you buy business. Take your own time, no matter what, before buying a shelf business. Nine times out of ten the prospective business will float around for a while, either online or offline, with the seller who’ll then be anxious if nothing comes around his/her way. If the seller is feeling anxious, you can tune this to your advantage as a buyer. The following are the common mistakes to avoid when buying a ready-made or shelf business:

Buying on price: Buyers shouldn’t take into account ROI or Return on Investment. Say you are going to invest $20,000 in a business that promises 5 percent net, you’ll be better off investing in mutual funds, stocks, commodities, municipal bonds or the local S & L. This is because any type of intangible security will anyhow throw up more than 5 per cent.

Cash shortage: As a buyer, you shouldn’t burn down all the cash for the down payment of the purchase. Remember cash management in the first 6-8 months of any business, existing or new, is critical. Failure to predict the future cash flow and potential contingencies that require injecting capital may spell disaster. Also, you need to set aside some revenue for business development activities including marketing and PR. For example, if you need to invest $20,000, ensure you don’t fund the entire amount, and reserve some capital for the immediate future. Though these numbers vary industry wise, it is safe to set a common contingency of 10 percent. Besides, you may have to reserve a sum as your working capital for operating business, following the three-month guideline, i.e. the amount you need to save so as to cover three months’ worth of operating expenses.

There are more factors to be covered in this blog, but that’s for another week in the subsequent part of the blog series.

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