There are many challenges caused by avoidable small business mistakes. Your life savings is at stake. You must know what you are getting into.
Among the very worst small business mistakes made when you buy or open a business are under capitalization, inexperience, and paying too much for an existing business.
First, there is inadequate capitalization. That means that you don’t start out with enough money. It is a classic cause of business failure. It is especially common to find undercapitalization when dissecting the reasons for the failure of a new businesses.
Here’s what leads to many small business mistakes. Start up costs frequently exceed your most liberal projections. The maze of business regulations and the necessary building and safety permits are an expensive and oppressive nightmare. The more you didn’t know about, the longer it takes to get your doors open. Meanwhile, you are paying rent for business space that you can’t use.
Don’t rush into any transaction without a great deal of investigation with the assistance of a CPA and a lawyer.
Many people get badly screwed when they buy a business. Your life savings is at risk.
People will often put more time and effort into buying a used car than they put into buying a million dollar business.
Here is one big tip: Many business sellers will defraud you about the profitability of the business income. It’s an old scam.
And here is how they do it. The seller of a retail business such as a restaurant claims he has two sets of books. This is the bait: The seller tells you there is significant cash income that goes unreported. If you don’t mind a little cheating on your taxes, your ears perk up! The unreported income is not on the books, naturally.
But the seller is asking for a price based on the “unreported” income. If you are a buyer, don’t walk away from that deal. Run from it. Run as fast as you can.
Surprise! You’ve been had, and royally screwed, and nothing you can do about it.
After you take over that business, you find that the big cash income was a all a lie. You are screwed, and you paid way too much for what was probably a failing business. There’s not much you can do about it.
You can’t very well sue because there is no proof of the lies. The “double set of books” never existed and naturally never mentioned in the sales agreement. And there are no witnesses. If you try to sue the for fraud, what are you going to say in court? “He cheated me because I relied on his false representations about how much tax cheating I would get away with?” Of course not. That won’t work and you will be laughed out of court. You can’t get anywhere with a story like that.
Opening a business – Lessons learned from the anatomy of a sad restaurant failure.
Here’s a case in point, concerning restaurant failures. I have a friend who owned a small family style Los Angeles restaurant. After a number of years, his lease expired. The landlord would not renew it without a huge rent increase.
My friend decided to move. He leased space in a shopping center. The space had never been a restaurant.
He was an experienced restaurant operator, or so he thought. But his experience did not immunize him from making some of the classic small business mistakes that newbies often make.
Many new building codes and regulations had taken effect since the last time he opened a restaurant. According to a survey, the median cost to open a restaurant is $275,000 or $3,046 per seat.
Everything at his original restaurant had been “grandfathered” in because he bought it as a going concern. But the new space was a raw build out. Nothing was “grandfathered.”
He was shocked to find some expensive lessons waiting to sink him. First, his new space required expensive plumbing modifications. He was not expecting that. It cost him an extra $25,000 that was badly needed for other improvements.
Then there were ADA disabled persons compliance and other improvements that he had not expected. That made the cost of bathroom remodeling jump by $20,000.
The poor guy ran out of money before he ever got the doors open.
He finally opened the restaurant. But he could not recover from the small business errors he made before opening. Those business mistakes left him with no operating capital. And, he started out in debt to all his suppliers. Making payroll was a struggle from day one. And, all the delays in opening meant he was paying rent on space that was no earning money. Also, he had investors, “silent partners” who trusted him. The investors were were a group of loyal customers from the old location who believed in him and agreed to back him.
Needless to say, the silent partners were furious over the mistakes and mismanagement. He was supposed to an expert restaurateur! But he finally got it open. Opening used up every last cent of his own available credit. Even his kid’s college savings account got tapped to buy last minute supplies. Finally, he was open, but had no cash left and he was already in the hole.
The poor guy could never climb out of the hole caused by his own small business errors.
His business debts piled up beginning the day he opened. Suppliers were never paid on time. Then they cut off his credit and put him on COD. Even sales taxes and payroll taxes were ignored. He stopped paying rent. There just was no money.
The financial strains ruined his marriage. His wife left and filed for divorce. He was sued by the landlord for back rent. Naturally, the restaurant got shut down.
So, you want to buy a business? Here’s a few things you better know to avoid gruesome small business mistakes.
Experience counts. You are asking for trouble if you start or buy a business without significant experience in the kind of business that you want to own. If you buy a business, don’t assume that the old owner can teach you everything there is to know.
Many business sellers will actually lie to you about their business income. It’s an old scam.
The seller of a retail business, such as a restaurant or retail store whispers into your ear that he has two sets of books. The seller tells you there is significant cash income that goes unreported. Naturally, the unreported income is not on the books. But the seller is asking a price based on the “unreported” income.
If you are a buyer, don’t walk away from that deal. Run from it. Run as fast as you can. Ordinarily, the buyer will have legal recourse against a seller who commits fraud by overstating the income. But if you are that buyer, are you REALLY going to sue because they buyer misrepresented the amount of taxes that you can evade? Your lawsuit won’t go very far.
What to do if small business mistakes have already put you in dangerous trouble.
Bankruptcy may reverse the small business mistakes that are bringing you to the verge of closing. Even if the business can’t be salvaged, personal bankruptcy may give you a fresh start to get you back on your feet. You won’t go very far in life saddled with old debts. Bankruptcy can sometimes allow a small business to eliminate debts. It can also allow a business to reschedule secured debts and delinquent taxes. Most bankruptcy lawyers will give you a free consultation. Do your homework. Find one or more lawyers to consult who have many years of experience. The accompanying short video lets you hear the normal questions and answers that usually are discussed during an initial bankruptcy consultation. The video features Jeffrey Wishman, a Los Angeles bankruptcy lawyer with 33 years of experience.