10 Reasons Why You Should Not Buy a Business
By Shawn Flynn
By Shawn Flynn
Are you bombarded with YouTube ads telling you to buy a business? My feed is filled with “experts” telling me that, “This is the best time to buy” and “It's a guaranteed Money Maker”, but hopefully everyone here can see through these advertisements. If not, the next time you see one of these ads, keep these items in mind (In the comments below, please add more reasons)
Lack of experience: If you never shot a basketball would you feel confident playing in a game? How is it that people without prior experience in business really expect to take over something and grow it to a size unimaginable by the former owner? Yes, in many cases the old owner commits to a training period, but if there is a bad relation with the buyer and seller or if the seller gets so much money from the sale that there is no material value for them to stick around once things are signed and transferred, then that previous owner may be nowhere to be found. They person just road off into the sunset with the bag of cash.
Insufficient funds: Buying a business can be costly and requires significant financial resources, which may not be available to some individuals. A problem here also lies in not having the working capital needed to operate the business once it's purchased…be careful of being undercapitalized… a small drop in sales or changes in some contracts and the company my become insolvent
Risk: Business ownership involves risk, and there is no guarantee of success. In Fact, the rate of failure is much higher than many believe and this is even with an established business with a great track record when a new owner comes in. Not saying you need to be okay with high risk, but know that it might also come with a lot of stress and a toll on mental wellness (refer to a past article titled “Mental Wellness as a Business Owner”).
Hidden problems: It can be difficult to fully understand the financial and operational issues of a business, leading to unexpected challenges after the purchase. Even with spending many months in due diligence looking at every aspect and bringing in many third-party professionals, things can still go undetected.
No alt text provided for this image
Competition: The market for a particular business may be highly competitive, making it difficult to succeed. This can range from another sandwich shop on the same street opening to compete with you or that billion dollar publicly traded company releasing a free version of your premium software product.
Changing market conditions: Market conditions can change quickly, making it difficult to remain profitable. Just think back to the past few years and the supply chain issues and how many companies were suddenly unable to operate.
Dependence on key employees: The success of a business may be heavily dependent on key employees, and the loss of these employees can significantly impact the company's operations and depending on the type of business and the geographic location replacements might be next to impossible to find. The hotel is in the middle of nowhere. Well, when the family that operated it decides to move, it might just become an abandoned building.
Regulation: Business ownership may involve significant regulation and compliance requirements, which can be challenging to navigate or next to impossible. There are many new laws in California around gas vehicles and their sales in the coming years, let's wait and see how those laws will impact the state.
Limited growth potential: The growth potential of a particular business may be limited, making it difficult to achieve long-term success or even to fulfil your short-term goals as the new buyer. I was talking to a founder the other night who had 100,000 users of their product. They originally thought that market sizes were hundreds of millions of users only to discover that their product was not able to expand outside of their initial target niche.
Personal reasons: An individual may think they want to be a business owner, but as soon as they become responsible for the lives of others the interest quickly disappears. Once someone finds out there is so much more to a business than processes, the dream of being an owner might evaporate or pivot to something else.
These are some of the reasons why someone may not want to buy a business. It is important to carefully consider these factors and weigh the potential benefits against the risks before making a decision that was brought on by listening to some Youtube or other social media ads.
If you thought this was helpful, please share and add to the conversation by writing a response.
Sebastian H. Amieva