Monahan Law Firm Logo

Mistakes to Avoid When Buying a Business

Updated: February 1, 2023

Est. Reading: 6 minutes

Are you considering buying an existing business? You may find that purchasing your way in could be an easier approach than starting from the ground up or gradually expanding your current business.

The negotiation process, however, can be complex and rigorous. There are a lot of financial decisions to make and legal matters to discuss with the previous business owner. It is important to be aware of some of the common mistakes to avoid when buying a business in Glendale, Arizona. Our Glendale business purchase lawyer will help you with all your legal needs!

Call today at (623) 300-2727 to set up your consultation at Monahan Law Firm, PLC!

Don't Use Your Own Name to Sign Documents

Firstly, you must be careful about signing documents in your own name because it could have major consequences down the road. Signing documents in your name means you are taking on obligations and responsibilities that you won't want in the future.

person signing a business purchase contract

When you are buying a business, it is important to remember that the documents you sign should be in the name of the entity that is purchasing the business. This means that if you are buying a business as an individual, your personal name should not appear on any of the documents. Instead, use the legal name of your company or limited liability company (LLC) when signing documents related to the purchase.

Not Understanding Why the Business Is for Sale

Before buying a business, it is important to understand why the business is for sale. If the seller is not forthcoming with information or if they are vague about the reasons behind their decision to sell, this should be a red flag. It could indicate that there are underlying issues with the business that have not been disclosed and could cost you thousands of dollars.

Prior to making the deal, it's important to ask questions and research the company thoroughly. For example, it is essential to determine if the firm is selling because of bankruptcy. The business owner might also be planning on starting a competing business in the same neighborhood, which could potentially hurt your sales. It's essential to uncover the true motivation behind the sale of the business so as to avoid any potential issues down the line.

FAQ: How will your new business affect your taxes?

Taking time out of the formal negotiation process to get to know the owner could be helpful in understanding their underlying motives, as any hints they may give away in casual conversation could be beneficial. Spending some time researching the owner's background and credit history may be beneficial. If you want to avoid making any major mistakes during your negotiations with the former business owner, you have the right to conduct a background check. 

Assuming That The Business Will Stay the Same

When buying a business, it is important to avoid the mistake of assuming that things will stay the same. It is easy to fall into the trap of believing that the current state of the business will remain unchanged after you take ownership, but this is rarely the case.

When there is a change of ownership, the way things are handled can vary, and new relationships with employees, customers, and vendors will be established. Businesses are dynamic and ever-changing entities, so as a new owner, you need to be prepared for shifts in value once the sale is complete. 

a business deal being completed with a handshake

While this is a challenging period for you as you take on ownership of your new business, it's also a unique opportunity to make notable improvements. As the new owner of a business, you can bring a fresh perspective and create a new spark in the business. You have the freedom to implement your growth strategies, strategic goals, business ideas, and business models into your new company.

Changing Things Too Quickly

When buying a business, it is important to take your time and make sure that you are making the right decisions. One mistake to avoid when buying a business is making changes too quickly. It can be tempting to jump in and start making changes as soon as you take ownership of the business, but this can be a mistake.

It is important to take the time to get to know how the business currently operates before you take over. Customers do not deal with change easily, and even if you have fabulous ideas about improving the business, rushing the process of change could end up in losing valuable employees and customers. To create a successful business, you must get a feel of the company culture and social environment.

Not Asking For Help

Many people think they can do it on their own when it comes to buying a business. While this may be possible in some cases, it is often not the best idea. Trying to do it yourself can lead to costly mistakes that could have been avoided with the help of an experienced lawyer. You could need the help of a good tax professional or a business broker. A lawyer can also be extremely beneficial to help you write and review contracts and legal documents.

Related Content: Should I hire a lawyer to help with selling my business?

Not Understanding Goodwill

It is important to understand the concept of goodwill when purchasing an existing business. Goodwill is an intangible asset that represents the value of a business beyond its tangible assets. It includes factors such as customer loyalty, brand recognition, and reputation.

Not understanding goodwill can be a costly mistake when buying a business. Without understanding how much goodwill is worth, you may end up overpaying for the business. Before buying the business, you should research who the business's customers are and how loyal they are. Ask people in the city where you are located if the business has a positive or negative reputation. 

Not Doing Enough Due Diligence

When buying a business, it is essential to do your due diligence. This means that you should research the company thoroughly and make sure you understand all aspects of the business before signing any contracts or agreements. Not doing enough due diligence can lead to costly mistakes that could have been avoided with proper research.

Monahan team discussing a business case

One of the most important things to consider when buying a business is its financials. You should make sure that even though the company may appear successful, it's not carrying underlying problems. Secondly, it's important that you research the company's legal standpoint because you don't want any unexpected surprises in the future. You can also ask the seller for access to all the business records and prior business transactions before buying the business.

Make sure to research the following questions so that you can do your due diligence and make a strategic acquisition:

  • Who will receive payment at the closing of the sale? What are the closing costs?
  • What legal actions are the business engaged in? What potential risks do these present? 
  • What were the previous business owners' financial goals and business plans? Do they have any business partners?
  • What assets does the business possess? What liabilities are associated with these assets? Are there any unpaid suppliers?
  • What debts does the business have? What is the ratio of the purchase price to debts you will be assuming?
  • Did the previous owner have any bad business habits? 
  • What are the current business cultures and company managements? 
  • Has the previous owner tried to carry out other business acquisitions that have failed? (In this case, you could talk to the previous potential buyer and question them about why they backed out of the business deal. In these conversations, you may be able to identify if you might assume extra unexpected costs or additional costs.)  

Contact Our Experienced Business Lawyer Today!

Purchasing an existing business is one of the biggest decisions you can make and, without guidance, it's easy to make costly mistakes. If you are considering buying a business, it's important to seek the advice of an experienced Glendale business lawyer in order to avoid common mistakes in the business buying process.

Contact our lawyers at Monahan Law Firm today at (623) 300-2727. and one of our qualified attorneys can help you navigate the legal complexities of purchasing a business and ensure that your interests are protected throughout the process. 

Share :
Attorney Patrick Monahan

Patrick Monahan

Patrick Monahan is the managing partner of Monahan Law Firm, PLC. Patrick began his legal career practicing real estate, construction, and general business litigation.
Text Us
tagphone-handsetmap-markerclockcrossmenu linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram