Confucius, the Chinese social philosopher whose teachings deeply influenced East Asian life and thought, once said, “If you make a mistake and do not correct it, this is called a mistake.” This cannot be further from the truth when it comes to buying a company. Here are 10 of the most common mistakes that become true obstacles when buying a company and how to avoid them:
1-Falling in love with a company
You should make sure to maintain your logical stance and keep your emotions at bay when it comes to the company in which you are interested. Do not let yourself be overtaken by the process and the desire to close the deal. To avoid this situation, it helps to study various possible acquisitions at the same time.
2-Looking for the perfect company
Machiavelli said that the best is the enemy of the good. All companies have flaws. The most important thing is to buy the one for which, with your capabilities, you can create more value than the old owners.
3-Accepting the asking price
Even though they may tell you that the price is firm and definitive, do not let yourself be influenced. Make counteroffers and start the negotiation dance. If they do not have another buyer that accepts the asking price, then the seller will enter your dance and continue to give in until you reach a satisfactory agreement for the both of you.
4-Not doing a comprehensive research on the company
Do not relax when it comes to the due diligence. The greatest flops in the company purchase process occur due to conducting only a superficial study of the information provided to you – for not asking enough questions or being satisfied with ambiguous or incomplete answers.
5-Having very little knowledge of the sector you are entering
Even though you may know the company well, you may be entering a sector in decay, with price wars, idle capacity, or a competitive dynamic that demands investments that you cannot handle. It is crucial to understand the industry that you are entering and its competitive forces.
6-Buying in a hurry
Avoid falling in the rush provoked by the seller and set your own pace in the process. Rush tends to reveal hidden motives. If you fall for the seller’s dynamic, you will not be able to negotiate or examine the company that you are buying properly.
7-Working with low-cost advisors
You get what you pay for. In a corporate operation, you should surround yourself with good advisors who are committed, analytical, demanding, and capable of detecting inconsistencies and defending your interests.
8-Not studying your partners
You may be so invested in studying the operation and finding funding to complete the deal that you spend less time analyzing the partners with whom you will make the purchase. They are just as important as the quality of the company that you are buying. One wrong partner could ruin a good acquisition.
9-Paying for the value that you will create yourself
Do not fall into the trap of paying for the potential that the seller says that the company will have if you fix this or that. All of this is value that you will create yourself. Pay the seller for what it is worth in that moment and leave all growth or improvements to create value for yourself.
10-Overlooking the ambiguities
When you reach a deal, make sure it is clear for how long the seller will stay, set in stone the payment methods, the responsibilities that you have to your partners, how your value creation will be remunerated, and close in a clear manner all aspects that may be relevant in your case. Do not leave anything open to interpretation because they will hurt you in the long run and make managing your new company difficult and could even ruin it.
This article was written by Enrique Quemada, Chairman of ONEtoONE Corporate Finance Group.
Book: ¿Puedo comprar una empresa? Yes, You Can!