Common Mistakes When Buying a Business in Singapore

As a business broker in Singapore, I interact with buyers daily at different phases of the acquisition process. It’s an interesting experience that allows me to reflect on the unique interaction I have with each buyer.

If this is your first time as an acquisition entrepreneur looking to buy a business in Singapore, this article will provide you with valuable insights. Few people embark on this Entrepreneurship Through Acquisition (ETA) route. Thus, there aren’t many reference points to consider in Singapore.

Understanding Your Circle of Competence

When searching for a business to buy in Singapore for the first time, ask yourself if it lies within your circle of competence. So, what is the "Circle of Competence"? It refers to the knowledge, experience, and skillset necessary to drive the growth of the intended business.

Without the right expertise, you incur what I call operational risk. New business owners often realize that they lack the capabilities needed to grow their acquired business. This realization typically occurs 6 to 24 months down the road when things are not working out.

A good example is John, whose professional experience is in B2B trade. He acquires a B2C business. Eighteen months later, he realizes that he doesn't have the necessary skills to operate it, and revenue has slipped.

Budgeting for the Post-Acquisition Phase

When buying a profitable business, you generally benefit from positive cash flow. However, some buyers neglect to set aside a budget for post-acquisition activities, such as business expansion and technological upgrades.

This is a mistake. Unexpected costs often arise only after you take over the business. As a rule of thumb, set aside 20% to 30% of the acquisition budget for post-acquisition needs.

Read Next Article: Pros and Cons of Buying a Business in Singapore: A Guide for Aspiring Entrepreneurs

Are You a Zero Fighter?

Every month, I receive inquiries from buyers who want to pay zero or less than 10% of the total selling price for the first tranche (the upfront payment for taking over a business).

While there's nothing wrong with this in theory, I consider this group to be tier-4 buyers for most SME deals. I often encourage them to seek out their own deals or collaborate with other M&A advisors.

As a Singapore business broker, I recommend that business owners only consider offers from buyers who can contribute at least 30% as an upfront payment for the first tranche. Such buyers are likely to be more serious and easier to work with because they have "skin in the game." Let’s not waste time, buddy!

The Myth of Passive Income

Many Singapore investors dream of "passive income." However, there is no such thing unless you're part of 2nd or 3rd generation wealth. Even if you own rental properties, you still have to manage tenants or maintenance issues. If you hire someone else to do it, that's a different story.

When you take over a business, you need to be actively involved unless your new venture can hire someone at a GM level who also has a vested interest. Otherwise, the business will just deteriorate over time.

During the due diligence phase, check all aspects of the business before signing the Sale Purchase Agreement (SPA). It can be a painful mistake to take the easy way out. Here are some essential aspects to verify:

1. Physical product testing, reviews, and complaints

2. Location, foot traffic, tenancy agreements, and local development

3. Bookkeeping and verification of any financial discrepancies

4. Sector-specific KPI metrics

5. Bank statements (cash movement)

6. Sales trends, distribution channels, customer concentration, and retention rates

7. Number of suppliers, inventory turnover, and stock levels

8. Organizational chart

   
   

Read Next Article: 5 Tips Before You Buy a Business in Singapore!

The Illusion of Work-Life Balance

Many employees venture into entrepreneurship to escape long hours, internal politics, or the grind of their current jobs. However, they soon discover they may end up working even longer hours with less pay and more stress once they own a business!

Ignoring the Human Element

Buying a business in Singapore isn't just about acquiring its P&L. You are also acquiring all aspects of it, including its people. Consider employees, management teams, and company culture. How will the acquisition affect them? Fear can spread quickly and harm your business unexpectedly.

Retaining key personnel is often crucial for a successful transition. Develop a plan for integrating the acquired business into your existing operations, or create a smooth transition for current staff. High employee turnover can disrupt business continuity, so consider offering a retention bonus as an attractive option.

Missing in Action (MIA) Buyers

Some buyers go MIA during the acquisition process. This leaves a negative impression on stakeholders, and they are less likely to prioritize you in the future. Most Singapore business brokers or M&A advisors will eventually put such MIA buyers on ice.

Overstretched Finances

Taking out loans to acquire a business can be beneficial. The right loan facilities and seller financing enable you to seize meaningful opportunities when they arise. However, if the loan repayment burden keeps you up at night, it's worth reconsidering.

An alternative is to involve investors who can take on a stake in the business. You don’t have to shoulder the entire burden alone. Roping in family, friends, or ex-colleagues can alleviate stress. A smaller deal that allows you to sleep better at night is better than no deal or a deal that causes you indigestion!

Conclusion: Buying a Business in Singapore

In summary, many aspects must be considered when looking to buy a business in Singapore. Flexibility, prudence, and consulting a Singapore business broker can make a significant difference.

Whether you are looking to buy a business in Singapore or sell one, let us help you. Talk to a business broker in Singapore today.