Let us continue from where we left in the previous blog. Here are more common mistakes to watch out for when purchasing a ready-made or shelf business:
Buying all the receivables:
It is common sense to buy the receivable, except when they are 90, 120 days old, or older. How often have we seen the buyers taking on all the receivables, even those in excess of 90 days? This can be quite risky because the older the account is, the harder it’ll will be for the buyer to collect again. You can also protect yourself by making the seller warrant the receivables; if something isn’t collectable, it can be charged back against the buying price of the business. For receivables in excess of 90 days, provide those to the owner, and check if he or she can collect the amount.
Most business buyers more often are at the receiving end of things when they accept all the details and data provided to them by the seller at face value, without an accountant (preferably a CPA) auditing financial statements. Most sellers would want to close the deal as soon as possible, and buyers usually allow them to take all the quick assets including cash, receivables and equipment inventories, and at times bring in equipment. The seller plays the buyer into literally anything, knowing that the buyer wants to strike the deal badly.
Heavy payment schedules:
Many first-time business owners have no idea of their revenue during the first year and, therefore end up paying a large amount to finance the buyout. Usually, however, revenue comes in trickles initially, and especially during the first year of any business operation, the owner has to face a number of non-recurring costs including employee turnover, equipment failures, etc. It is important to set a payment schedule that is light on the money, then gets heavier as the business progress. This is something that the buyer can work upon with the seller, and shouldn’t be ideally difficult.
Unfair treatment to the seller:
It is not always that the buyer can put the seller back to his/her wall. Because the buyer is funding the transaction, he/she can’t be in the driver’s seat always. Genuine sellers will discard aggressive buyers and would prefer people who will be a bit flexible in the negotiation process.