1.  Bad expensive lawyers get defensive quickly. Very bad and expensive lawyers get defensive extremely quickly. If you got into the profession for the money, you probably don’t like your job, are unhappy and need the salary as anesthetic. Lawyers don’t like cheap lawyers and cheap solicitors.

2.  Cheap lawyer implies knock off Louis Vuitton hand bags, not efficiency and innovation. Instead, think NetFlix, Amazon or LoveFilm.

3.  Cheap solicitor means less profit unless you become more efficient (which requires work and imagination).

4.  Cheap lawyer means no plush offices and expensive lunches.

5.  Cheap solicitor means no more ridiculous hourly billing rates, wasting time and being transparent about where the client’s money goes.

6.  The legal profession, like most other high paying professions, is protectionist.

7.  Cheap lawyers and cheap solicitors can’t boast about being efficient in the same way as expensive lawyers can boast about their hourly billing rates.

Matrix Law Group lawyers have recently been hired on a couple of small business purchases so I thought I’d share the seven biggest mistakes I’ve seen entrepreneurs make when buying a business.

Mistake 1: Not doing your due diligence

By far one of the most common mistake by buyers is not doing their due diligence (or investigating the legal and financial state of the business they are buying).  I have met a lot of entrepreneurs that have regretted not getting an accountant to look at the finances or lawyers review the legalities of a business they have bought.  One example involved a buyer of a small online gambling business based abroad.  The business looked great but it was only after committing to the purchase that he realised that online gambling was actually illegal in the country where the business got most of its customers.

Every business has some kind of problem, make sure you know about it before committing to it.

Mistake 2:  Buying assets or shares?

Entrepreneurs should structure the purchase of a business in the most tax and cost efficient way but protect themselves at all times.  For instance, should you buy the assets or the shares in the company that owns those assets?

The answer is not always straight forward.  Your decision can affect your tax liability in the long term, your long term legal liability (if you buy shares) and the duration and complexity of negotiation process (buying shares generally requires less documentation and often takes less time (which means lower legal fees)).

Mistake 3: Not having a lawyer negotiate the terms of the purchase at the start of the negotiating process.

An entrepreneur’s strongest leverage as a buyer is often after the price and terms of a purchase have been agreed. This is usually after the buyer has completed his due diligence.

A buyer should remember that the negotiating process is long, complex and partly depends on the results of your due diligence. It is a good idea therefore to avoid overly prescriptive terms early on in the negotiation process such as fixed prices.  Negotiating all the material terms of the deal and putting them into writing when you don’t know everything about the business you are buying is not a good idea.  Get a lawyer involved as early on in the process as possible, it doesn’t have to cost you anything extra.

Mistake 4:  A low limit on the seller’s liability to the buyer.

It is very important for your long terms success and peace of mind that certain key provisions be inserted into the purchase agreement.  An entrepreneur buying a business should avoid agreeing to low limit on a seller’s liability (a limit basically means that if the seller has breached the agreement, the buyer can only recover up to a certain amount).

What if the seller has been hiding problems with the business from you? You would of course be entitled to sue for compensation. One case I heard of involved a buyer who discovered accounting fraud by a small business however he was unable to sue because the seller’s liability was limited at such a low level that it would not have been worth it.

Mistake 5:  Not running the negotiations through the lawyers.

I know this will appear like a sales pitch but please think about it.  Don’t you want to get the most out of your lawyer?  Get a fixed fee for the work and make sure you include the negotiation process as part of your deal with your lawyer.  A lot of sellers will try and undermine a buyer’s lawyers, criticise them and try to negotiate key issues without lawyers present.  Tread carefully.

Mistake 6: Beware of ‘cool’ or ‘sexy’ businesses and getting emotional about a particular business.

So many entrepreneurs I meet talk about their ambition of owning a yoga studio, a restaurant or a trendy coffee shop.  I always respond in the same way to these entrepreneurs, I tell them that ‘cool’ or ‘sexy’ businesses are very rarely prosperous and profitable businesses.

Choose the industry/sector you buy a business in carefully and try and stay away from overly competitive sectors with high failure rates.  Buying a business is an investment not a fashion decision.

Mistake 7:  Not shopping around and overly competitive environments

A lot of people bought their homes during the recent property boom and regretted it.  They bought their homes in a hurry and in a seller’s market (everybody else wanted to buy because they feared that if they didn’t buy quickly, they would miss out).  Buying a new home became emotional and an automatic decision with little thought and not a well thought out investment decision. The same applies to buying a business, – timing and market conditions are key.

Buying a business should be an investment decision and should be based on sound financial and legal advice and your experience.  A lot of entrepreneurs make the mistake of buying in a hurry in overly competitive environments. For instance, some buyers talk to just one potential seller and do not shop around enough.  The danger in doing this is that entrepreneurs are negotiating the terms of the purchase (such as price) when there are too many other potential buyers.  There is nothing that will give an entrepreneur less leverage in connection with buying a business than an overly competitive market.  The entrepreneur will find it more difficult to get a good deal.

Conclusion

Buying a business can be a very difficult and emotional experience, particularly for first-time entrepreneurs.  If you can avoid the mistakes above, I am confident that the sales process will be a lot more productive and beneficial to you.  Email me if you have any questions patrick@matrixlawgroup.com or contact us through our website at www.matrixlawgroup.com

2. We have no permanent offices, staff, no huge expenses or overheads.

3. We understand entrepreneurs because we are entrepreneurs.