The Most Common (and Costly) Mistakes People Make When Buying a Business

 If you’re thinking about buying a business, there isn’t one mistake you need to avoid — there are dozens. https://youtu.be/mZBIFjTAsKk 

I get asked this question constantly:

• “What’s the one thing I should watch out for?”
  
  

• “What’s the biggest mistake buyers make?”
  
  

• “What common pitfalls should I avoid?”
  
  

So I finally sat down and started writing a list.

It didn’t stop at five.
It didn’t stop at ten.
It went past twenty.

That’s why I eventually wrote the book, 21 Stupid Things People Do When Trying to Buy a Business. But before I explain that, let me give you a snapshot of the kinds of mistakes I see over and over again.

Mistake #1: Not Understanding How Businesses Are Valued

This is a huge one.

People routinely pay too much because they don’t understand:

• What cash flow is actually available
  
  

• What kind of return investors require
  
  

• How risk affects value
  
  

Without this foundation, everything else falls apart.

Mistake #2: Ignoring the Value of Their Own Labor

I see buyers say things like:

“The business makes $120,000 a year — that’s great!”

But they never stop to ask:

• How many hours will I work?
  
  

• What wage am I effectively paying myself?
  
  

• Is this actually a good investment after I account for my time?
  
  

If you don’t value your own labor properly, you will overpay.

Mistake #3: Getting Operating Capital Wrong

Many buyers value the business correctly — but then forget that:

• Inventory
  
  

• Accounts receivable
  
  

• Cash buffers
  
  

…are required to operate the business.

They end up buying the business but not the enterprise, and that mistake can cost tens or hundreds of thousands of dollars.

Mistake #4: Overcommitting Cash Flow to Debt

This one kills businesses.

Buyers stretch debt payments to the limit, leaving no margin for:

• Seasonality
  
  

• Repairs
  
  

• Slowdowns
  
  

• Mistakes
  
  

A business can look profitable on paper and still collapse under too much debt.

Mistake #5: Failing to Get the Right Help (or Any Help at All)

Some buyers get no help.

Others ask the wrong people.

Lawyers, accountants, friends, and family often mean well — but many of them have never bought a business themselves.

Even worse, some buyers rely entirely on brokers who only get paid if the deal closes.

One of the advantages of working with me is simple:
I will tell you not to buy a business if it’s a bad deal.

Other Common Mistakes I See All the Time

Just to give you a sense of how deep this goes, buyers regularly fail to:

• Make realistic financial projections
  
  

• Budget for capital expenditures
  
  

• Perform proper due diligence (this alone spans pages)
  
  

• Hold sellers accountable for their claims
  
  

• Research franchisors properly
  
  

• Understand the power a landlord holds
  
  

• Maintain adequate cash reserves
  
  

I’ve even seen franchise deals where the franchisor itself was at serious risk of insolvency — a disaster waiting to happen for the franchisee.

Why This Keeps Happening

Most people have never bought a business before.

They pick up a little information, gain some confidence, and move forward with far more bravado than understanding. The reality is that learning to navigate business acquisitions properly can take years.

That’s why education has to come first.

If you want to learn the full three-step process I use to help people buy businesses — starting with education — visit BusinessBuyerAdvantage.com 

And if you’re serious about buying a business, do yourself a favor and read 21 Stupid Things People Do When Trying to Buy a Business before you write your first offer.

It might be the cheapest mistake prevention you ever buy.

Want deeper dives like this?
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Should You Use Your Retirement Funds to Buy a Business?

 This is a common question I receive, especially from people in the U.S. where there are options to use 401(k) savings for financing a business acquisition. While it may seem like a great way to avoid borrowing from a bank or paying high-interest rates, the risks are significant, and it’s essential to understand the implications. https://youtu.be/37t2lK1lZ_w

Using Retirement Funds in the U.S.

In the U.S., there's a legal structure known as Rollovers as Business Startups (ROBS), where you can use your 401(k) savings to invest in a new business. Here's how it works:

1. You set up a new entity to buy the business.

2. Your new entity starts its own 401(k) plan.

3. You transfer your existing 401(k) funds into the new company's plan.

4. As the new company’s controller, you can direct the 401(k) to invest in the business.

While it sounds simple, it's legally complex, and there are companies that specialize in managing this process to ensure you comply with tax laws. However, failure to meet all legal and tax obligations could result in penalties, such as having the transferred retirement funds treated as taxable income.

The Risk to Your Retirement

When clients ask if they should use their 401(k) to buy a business, I ask them a critical question: If the business fails, do you still plan to retire? This money is meant for your retirement, and the failure rate of small businesses is high. Using these funds could jeopardize your financial future, not just your present situation.

The Accountability Problem

Many people are drawn to this idea because they think that by avoiding interest payments to a bank, they’ll save money. However, you should hold yourself to the same standards a bank would when lending money.

If you use retirement funds, you must ensure that the business is producing a rate of return similar to what the bank would expect for such a loan. This means you should be disciplined enough to repay your retirement account with interest, as you would with any other loan. The issue is, most people aren't as strict with themselves as a bank would be.

A Possible Exception: Secured Lending

One scenario where I can see using retirement funds making more sense is if you lend the money from your retirement account as if you were the bank. For example:

• Let’s say you’re buying a small business and need a loan for a vehicle. Instead of borrowing from the bank at an 8% interest rate, your retirement account could lend the money to the small business, secured by that vehicle.

• If the small  business fails, your retirement account, holding a secured lien, can repossess the vehicle and recoup its investment. This way, you treat your retirement fund the same way a bank would, ensuring it’s protected.

• I have no idea how to set this up, you’d have to get tax and legal advice.

Consider Your BATNA

Your decision ultimately depends on your Best Alternative to a Negotiated Agreement (BATNA). If you have other opportunities—like employment or alternative investments—you should weigh those before risking your retirement savings. In cases where you have no other options, using retirement funds might feel necessary, but I caution against it unless you're sure you can protect that investment as a bank would.

Final Thought: Retirement Money Should Be for Retirement

At the end of the day, your retirement funds are meant to ensure a comfortable future. Using them for a small  business acquisition puts that future at risk. Unless you're confident in securing those funds properly, it’s often wiser to leave them untouched and explore other financing options for the small  business.

If you’re interested in exploring small business buying, selling, sign up to my email list https://www.DavidCBarnettList.com to keep you updated whenever we post new videos and content. 

How to Buy a Business in a Potential Recession

How to Buy a Business in a Potential Recession

Today, I’m addressing a great question from Jesse, who’s concerned about buying a business right before a possible recession. Here’s how you can approach this situation with caution: https://youtu.be/1MVbXYpYFCA 

1. Assess Industry Impact

• Recession Sensitivity: Different industries react differently to economic downturns. For example, luxury goods and travel-related businesses often suffer more during recessions than essential services like healthcare or basic consumer goods. Evaluate the industry of the business you're considering. Are its customers likely to cut back on spending during a recession?

• Local Economy: Consider the economic health of the area where the business operates. If major employers in the area are vulnerable to a recession, the local economy might decline, affecting local businesses.

2. Evaluate Expense Structure

• Variable vs. Fixed Costs: Businesses with high fixed costs (e.g., rent, salaries) are more vulnerable to revenue declines. Look for businesses with more variable expenses that can scale down with reduced revenues. This flexibility can help the business weather economic downturns better.

• Cost Management: Review how the business manages its costs. Can it adjust its expense structure if revenues drop?

3. Review Reporting Systems

• Financial Monitoring: Ensure the business has strong reporting systems to track financial performance in real time. Good reporting helps identify problems early, so you can act before issues become severe.

• Data Accuracy: Verify that the financial data you’re reviewing is accurate and up-to-date. Strong reporting systems should reflect real-time performance and trends.

4. Negotiate Terms of Sale

• Financing Structure: If possible, negotiate favorable terms with the seller, especially regarding financing. Seller financing can be flexible and might include terms that help you manage downturns, such as interest-only payments during slower periods.

• Flexibility in Terms: Discuss terms that allow for adjustments based on business performance. For instance, you might negotiate terms that adjust based on future sales or performance metrics.

5. Understand the Seller’s Motivation

• Motivation Check: Find out why the seller is selling. If they’re motivated by personal issues rather than economic conditions, they might be more open to negotiation and seller financing.

• Seller Insight: A seller who’s transparent about their reasons for selling and willing to assist with the transition can be a good sign. Conversely, if they’re insistent on a high price with no flexibility, they might be trying to offload a problematic business.

6. Build a Relationship with the Seller

• Trust and Communication: Developing a good rapport with the seller can provide valuable insights into the business’s true condition and the seller’s motivations. A cooperative seller can also offer support and advice post-sale.

• Negotiation Stance: Approach negotiations with a mindset of collaboration rather than confrontation. This can lead to better terms and a smoother transition.

Final Thoughts

A potential recession doesn’t necessarily mean you should avoid buying a business, but it does require more careful consideration and due diligence. By evaluating the industry’s sensitivity to economic changes, understanding the business’s expense structure, and negotiating favorable terms, you can better position yourself to make a sound investment.

There is an entire module in Business Buyer Advantage: Online Training all about structuring purchase deals in a recessionary environment. Learn more at https://www.BusinessBuyerAdvantage.com

If you haven’t already, sign up for my email list at https://www.DavidCBarnettList.com