Common Mistakes to Avoid When Looking to Start a Small Business
By Ron Peltier
As you decide to invest in a small business, you need to evaluate each business carefully. There are some common mistakes that many seasoned and first-time small business investors commit. While this list is not meant to be exhaustive, it outlines some basic ideas.
Being Dead Set on one Type of Industry
When you are dead set on one industry, you limit your opportunities. Sometimes good investment opportunities are found in other industries that you might have thought were not good for you. Keep an open mind when looking for a small business investment, and always consider the purchase of a small business as an investment first.
Being Dead Set on Avoiding Some Industries
Also, when you are dead set against certain industries, you restrict your chances of finding the right investment. Don’t look past some investments just because they are not what you had in mind. Again, thinking of small business as an investment first can help broaden your perspective on whether or not a business is good for you.
Understanding The Financial Statements
There is a good reason prospective buyers want to analyze the financial statements of a business. Often, financial statements indicate the health of the business and reveal if the business is in trouble financially. The presence of financial statements alone may not, however, indicate the “real” profitability of a business. Like everything else, financial statements are just one piece of the information puzzle you need to consider as you look at your small business investment.
Lack of Financial Statements
For some small business investors, a lack of financial statements adversely impacts their decision to invest. Certainly, folks fresh from MBA programs have been taught that analyzing financial statements is the way you determine if a business is profitable. That is one way, but not always the best or most accurate way.
Suppose you want to purchase a small business but it does not have good financial records. This could be an advantage for you, the buyer. A lack of financial statements does not mean the business is not profitable, necessarily. It could mean that the owner struggled with creating and/or maintaining financial documents. Or the business might not have been open for a long time, thus never filed a statement with the IRS. There are a variety of reasons for a lack of financial statements. Don’t write the business off because of that. With some investigation into the business, you can determine whether it is profitable.
Examining Financial Statements
Financial statements are not necessarily a clear-cut, black and white indicator of the business’s profits. You need to be aware of that as you look into those documents, including tax returns. Often, personal expenses and other deductions should be added back to the business’s profitability. For example, if the seller of the business was absentee and had a manager who helped run it, but you plan on assuming that role, it is fair to add back the expense of that manager to the profits of the company. Conversely, if a business has several family members as employees, who worked for the business but did not always draw a salary because they were family, it is prudent to deduct the expense of those employees.
Often, prospective buyers are dissuaded from putting in an offer because they perceive the business has too much competition to deal with. Being cognizant of the competition is smart, to be sure, but don’t overanalyze competition too much. With the right business strategy, many competitors can co-exist, and you can beat the competition.
Many industries have competitors, but they survive. How many pizza places are there in your town? Look through your coupon drawer or do a quick Google search to see how many are in your town. Several similar businesses can survive and thrive in an area.
You can find a small business investment that fits your skills and budget. Avoiding these mistakes is one way to find the right business for you.