Tales From The Trenches – Avoid These 10 Buyer Mistakes
The 10 Biggest Mistakes Buyers Make
Things to Avoid When Searching for Online Businesses
You don’t need to go far today and find an Internet guru who’s going to show you the path to digital riches – once you’ve purchased their overpriced disk series, personal coaching package or monthly subscription service. It’s a magical land where you can quit your day job, escape the cubicle, learn a few online tricks and shortcuts and soon be running a 7-figure business from your laptop in the Caymans.
Those guys are everywhere. Here’s what you don’t see much of – real world advice on how to effectively purchase an online or tech business. How to find the deal, vet it, understand the people and place, make the right offer, get it done. That’s not so sexy. But there’s a real need for investors and buyers to get better at the buying process.
Some day I’ll write a book. For now, these are what I consider the Top 10 mistakes buyers make, cultivated from many years of watching many flail and flounder, while others flourish.
Mistake #1: Paying too Much Attention to Price
By 1,000 miles, this is the number one mistake buyers make. They do a basic review of the offering, look at the price, calculate the multiple, and conclude the seller is asking an unreasonable price and isn’t worth their time. One of the first deals I closed as a broker many years ago was a listing that started at an asking price of $1,250,000. It sold for $180,000. It happens. Many buyers don’t pay enough attention to the seller’s situation. Some owners simply must sell, no matter what. I often recommend buyers simply disregard the asking price. Look carefully at all sides and dimensions of the deal, aside from price, then pursue what fits your needs.
Mistake #2: Eliminating Online & Tech Businesses as a Purchase Option
I wish I had a dime for every buyer prospect who said something like “I’m not interested in Internet businesses. They are very iffy, a lot of the earnings are not real, I don’t trust what they say.” This is one of my personal goals as an online broker and entrepreneur – to build greater public awareness of the power of online business models. Once someone fully understands scalability, risk reward ratios, lifestyle potential and favorable investment factors associated with digital businesses, they’ll likely not want to look at offline businesses again.
Mistake #3: Too Undefined A Search
A buyer prospect who tells me they’re looking for “a restaurant or a gas station or maybe health supplements or a body shop” is not going to grab my attention. The way to find a solid business opportunity is to drill down. Pick a lane. Whether that’s by industry vertical or geographic location or price range or monetization method. Find your niche and stick to it. You’ll be able to locate the people and players who’ll make things happen. A mile deep and an inch wide works..
Mistake #4: Not Leveraging Brokers Properly
Some folks mistakenly think you can hire a business broker to find you great deals in the same way you’d hire a realtor to find a home. Sorry. We don’t work that way. Not unless we’ve built a shared history with you, based on successful closed deals. We generally start the deal-making process from the Seller’s side, through exclusive listings, then get hold of buyers afterward. Where most buyers fall down is not working with brokers effectively to find off-market deals. Many business owners are willing to entertain an unsolicited offer. A broker is likely to know those folks far better than you. Work with brokers to identify your purchase criteria, price range, preferred business model, so they can put you together with a good seller.
Mistake #5: Being Fixated on the Multiple
This is an extension of #1 that rears its ugly head a lot. Look at multipliers as general guidelines for valuations. We brokers often overuse them. Buyers often over-estimate their importance. A simple number gives the false impression you can compare businesses apples to apples. That’s not really possible and shouldn’t be the goal in your search anyway. You’ve got to take a well-rounded view of all the investment and operational criteria.
Mistake #6: Not Understanding the Marketplace and Competition
This is a huge and often overlooked part of the search process. I urge buyers to pick up the phone and start calling people. Don’t let online searches and web research be your only source of information. The only way to truly understand the marketplace you’re entering is to talk to folks in the industry, whether that’s direct competitors, consultants, contractors, employees, distributors. When you buy a business, you’ve got to know how it fits into the big picture of the marketplace.
Mistake #7: Arguing About Price – Way Too Early
I can’t tell you how many times callers want to convince me how overpriced a business is – long before they know much of anything about the offering. Some of these businesses wind up selling at the asking price, or even above. Don’t treat business sales like used cars lots. There’s no Kelly Blue Book available. It’s a given that business owners and brokers seek the highest possible price. A reasoned, fact-based, unemotional discussion will go a lot farther in convincing a seller to come down in price than barking numbers in the first two minutes of a phone call.
Mistake #8: Being Too Narrow in Your Search
This is the flip side of #3. Many buyers frustrate themselves by adhering to super-strict guidelines that wind up being unattainable. It’s good to be very targeted in your search. But don’t get stuck in the muck. Keep your eyes and your heart open to opportunities that may expand your strike zone a bit. In the online universe, maybe you should consider a Shopify-only storefront rather than an Amazon business. Maybe consider a content website rather than something that sells physical products. You get the drift. Don’t shut off ideas that could improve your future.
Mistake #9: Not Paying Attention to Time On Market
Many business buyers seem oblivious to the “time on market” factor. Most marketplaces like BizBuySell, BizQuest or Axial don’t publish listing dates. But you can do some detective work by looking at the listing number. Listings are numbered chronologically and the number stays the same even when listings are updated. Locate the listing number, then call the broker and find out when it was listed. Then find another listing that’s earlier in the numbering sequence, call that broker and determine that listing’s age. Pretty soon you’ll be able to pinpoint listing ages. Then go after the geezers, the stuff that’s been around awhile. This is often where good deals are found.
Mistake #10: Not Lining Up Your Capital
It’s super important before approaching a seller or broker to know how you’re paying for it. If you need a loan and only want to put 10% or 20% down, then do some legwork to understand the process, the players and the pricing. Also, be prepared to present a Proof of Funds, showing you have cash at the ready. Don’t make rookie mistakes by not knowing how you’ll structure a deal if you find one.