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Is buying a business like buying a car

A couple of months ago, one of our clients bought a business. We’ve been working with them for only a couple of weeks but it’s become apparent that there are pretty serious discrepancies between what the seller told them about the business and the reality.

The more we’ve talked, the more it seems like buying a business is a bit like buying a second hand car… So what do you do to make sure you don’t get sold a ‘nail’?

Get it checked out by a professional

Ideally if you’re buying a car you’d get it checked out by your own friendly mechanic. They would be able to assess the car properly, look for the possible flaws and give you a ‘report’ on whether it’s a good buy or not. In business you would ideally have your local friendly accountant look at the books and see what exactly it is you’re buying.

In both cases, these experts give you an impartial view and can spot things that only an expert can. Mechanics will know how to spot an engine that has been ‘bodged’ or is on it’s way out. An accountant will be able to spot where numbers are being inflated or where things ‘just don’t add up’.

Look for the signs

Having a professional look at the business is one thing, but you should be able to spot the signs that you’re being sold a ‘nail’ too. You’re looking for signs that the seller is a careful and organised person usually. Paperwork being clean and tidy, the car/business looking respectable – these are all basic things to look for.

That doesn’t mean that you’re automatically on a winner, but if they fail at even the basics, imagine what their attitude is to their belongings?

Also beware of pressure selling. Phrases like ‘someone else is interested’ and ‘I need an answer today’ should set off your warning bells.

There’s always a reason for selling

The old adage ‘If it looks too good to be true, it probably is’ does fit most of the time. Though some sellers do have a good reason to sell, you have to assume (as a savvy buyer) that they’re not telling you the real reason for selling.

So if you’re being offered an unbelievably good deal, ask yourself why.

Acceptable ‘too good to be true’ reasons are ‘Something bad has happened and I need the money’, ‘I’m emigrating and haven’t been able to sell it so I had to drop the price’ or ‘it needs x work and I don’t have the money’. That doesn’t mean jump in with both feet, but it does mean that if they are telling the truth (and hopefully you can find out for sure) you’ve got your reason.

Bear in mind however, that usually the real reason people sell their car or their business is that it’s showing signs of going wrong somewhere. And you may not know what that reason is until you’ve run the thing for a while and experienced it.

Weigh up the risk

There are good reasons to buy if the overall value to you is more than what they’re selling it for. If you’re a savvy business person and you know the inherent problems in that industry, you might decide that it’s worth a punt. You might decide that a few dents on the body are irrelevant to you if the car has a sound engine or you can get a good deal on parts.

Weigh it up properly and you may be able to use that as a bargaining chip to lower the price.

Do the research

In all these things, don’t go in blind. If you’re looking at a specific type of car, find out what the ‘normal’ flaws are with that particular model. If you’re looking at a business, find out about the area, the people, the reputation of the business. These things are important. Above all, trust your instincts!

Ultimately there is no ‘test’ drive in business. And test driving a car doesn’t necessarily mean you get the full picture. You are taking a gamble no matter what you do, however do your best to calculate the risks.

A couple of other points to mention.

Try your best to never do the deal on the same day.

Never get emotional about a big purchase.

Always, always, get someone else’s opinion (because 2 heads are always better than one)

Again, trust your instincts!