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What to avoid when buying a business

Buying a business instead of starting one from scratch can save you many headaches. However, buying a business still has its challenges. If you are considering this kind of investment, you will want to do your research carefully and be sure to avoid the common mistakes others have made when buying businesses.

According to a recent Forbes article, the following are five of the most common mistakes people make when buying a business:

  • Assuming that finding a high-potential business for sale is a part-time job.
  • Buying a business without understanding the motivation and emotions of the seller.
  • Not understanding why the business generates profit.
  • Failing to completely research the business.
  • Overestimating the value of the business.

When looking to buy a business, it is important to devote enough time to the search. You should avoid becoming impatient during a long search process because impatience will affect your ability to accurately evaluate your opportunities.

You must also strive to connect with the owner, who will generally know more about the business than you will. By getting to know the owner, you will be able to determine what his or her reason is for selling and if that reason would affect your success as a new owner.

Before committing to any purchase, it is important to understand as much as you can about how and why the business works. Be suspicious if the profit margins are higher than the industry average or if they have increased recently. You should also research all aspects of the business thoroughly with multiple sources, including industry experts, financial records, former employees and competitors.

Avoid overestimating the potential of a business opportunity by forecasting future cash flows conservatively. Be sure to also evaluate future capital expenses realistically, remembering to factor in your own salary.

Buying a business can be a great investment if you evaluate your opportunities carefully and are prepared for how challenging the process can be. Understanding the mistakes others have made can give you the foresight to avoid them, setting you and your new business venture up for success.

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