1. Speculating about a seller’s motives
At the end of the day, you will never know why or when a seller will decide to sell their business. You shouldn’t care why or when – what matters is that you want to be on that shortlist of potential buyers when the sale comes. Even if an ideal prospect was not interested, says, six months ago, there is still the possibility that he or she may change their mind. Keep in close contact so that they will remember you when they are about to sell again.

2. Failing to remember that buying is selling
Not every company is sold to the highest bidder. Most sellers are concerned with the nature of the “fit” and the way they perceive that they and their employees will be treated following the sale. Compare it to the first few dates in a relationship. If you aren’t nice, courteous and respectful during the early stages, then why would your partner think about getting married one day?

3. Not using experienced professional advisers
For the first few acquisitions, it is wise to use qualified advisers. Naïve buyers and sellers frequently make mistakes, and mistakes can prove more costly than if they were to hire a professional adviser. Some buyers think that a failed acquisition effort is not worth paying for. Sometimes, though, you make more money by not doing a deal. The aim is to do a right deal at a right price for you. What your adviser can do is to keep you up-to-date about what competitor buyers are doing, both from direct experience and research. Their knowledge of the market can prove invaluable in helping you to bring an acquisition successfully to a close.

4. Discussing price without having an objective, underlying pricing rationale
Sellers who are offered four times the earnings before interest and taxes may be offended. If the difference can be explained by a severe working capital deficit, be able to demonstrate that your offer is really six and a half times this, less the necessary adjustment for the working capital you will need to inject into the company. Have the ability to articulate your valuation rationale and negotiate from it rather than adopt a “Higher!” or “Lower!” approach.

5. Being inflexible regarding the structure of a deal
Sellers generally prefer to sell stock, while buyers often prefer to acquire assets and take on known liabilities. The structure, however, often has pricing implications, so you must be prepared to offer alternative structures at differing prices. Articulate the rationale for pricing differences.

6. Trying to cut out a seller’s adviser(s) and deal directly
The seller who has professional representation has that for a reason. Deal with the owner(s) on important issues and deal through intermediaries. More often than not, your efforts will be regarded as an attempt to take advantage of the owner. The advisers are getting paid for their work, so let them get on with it.
And don’t be afraid to include the seller’s investment banking expenses in your offer payment. It is a psychological ‘win’ for both the seller and yourself – if you remember that it is part of your purchase price.

7. Promising that “nothing will change”
Both you and the seller know that things must change after the acquisition. Discuss what changes need to be made with all parties involved.

8. Failing to conduct proper due diligence during appropriate periods
Ask all of your questions in an objective fashion before you agree to the acquisition. Due diligence is not only legal and financial in nature, but also operational. Keep in mind that the cost of the surprises following the acquisition are adverse to the buyer. Pinpoint the impact of the most likely post-deal surprises in the final agreement, but also remember that no rational seller will endure an infinite ‘tail’ on adjustments. Ensure that you reach a balance between an acknowledgment of any potential risks and your ultimate goal.

9. Not willing to walk away
Some deals are probably left better off undone, even if you have invested a lot of time, effort and money. The biggest pricing mistakes and errors in judgment in negotiation occur when buyers are “overcome by the deal”. It is every seller’s dream to find an irrational buyer. So don’t become one.

10. Perceiving the deal as done
Remember that the close of the deal is also the beginning. It’s like a marriage. There are two parts in a marriage: the having and the holding. When you have settled the acquisition, you still need to hold it – by integrating it within your organisation financially, operationally and in terms of management and leadership. Don’t make the mistake of thinking the deal is done at the point of closing.

I often wonder if business owners who are looking at purchasing a business take the same sort of outlook as when they are buying something in the stock market.

Let’s take some thoughts from the way Warrant Buffet looks at a company and determine if we could be using those same successful strategies.

Those strategies tend to be summed up in a very concise manner -> make sure you understand what you are buying, ensure the industry prospects are favorable, and if management is going to stay on in some capacity make sure they know what they are doing!

Many owners I meet look to buy into businesses, or franchises for that matter, in an industry they don’t understand. We would say that if you can’t positively feel good about knowing the real sales potential, how expenses occur, what is the cash flow cycle of the business then you should not by look to purchase that business. Naturally many business owners will often get a strong sense of missing a major opportunity – the business owners forgets that Buffett once said ‘above average results… are often produced by doing ordinary things’.

Many business owners like to focus on buying a turn around business, a business that has been either abandoned or poorly managed by its previous owners. While there are clearly some great turn around stories out there, more often than not these transactions become large challenges and financial nightmares. More simply speaking: The business was cheap to buy for a reason!

In a perfect world, (and we realize it’s not!) it is optimal to consider purchasing a business that has a solid product and reputation.

The people aspect of purchasing any business is also important, and great investors such as Buffet place a large emphasis on management. Obviously the business purchaser has the focus of either keeping management or replacing management. Naturally management that has a focus on the bottom line and on long term growth are to be very valued.

At a certain point it gets down to ‘price’. Business acquirers should focus as much on return on equity as just net income. That is one the key areas in a Buffett type purchase decision. A huge mistake is to also focus on volume as opposed to profit margins. Most business acquisitions involve the buyer assuming or generating debt. The overall focus, it goes without saying is to minimize debt.

Getting back to our legendary investor, Buffett creates a formula for what he calls owner earnings – which formula is as follows:

Net profit + deprecation – Capital assets needed to be acquired

We would agree that this is a great way to look at profit potential in any business being acquired.

Buffett modeled his career on one book, a famous finance book entitled ‘The Intelligent Investor ‘, by a fellow named Ben Graham. As dry and out of date this huge text might seem to today’s business person, we could still all use a little ‘ intelligent investing’ assistance when make a major decision to buy a business.