It’s okay if you’re not sure what questions to ask when buying a business as long as you’re thorough and cover all of your bases. You need to ensure that the business and target market is a perfect fit for you and that you have all the information you need to make an informed decision.
Asking the right questions will help you identify all the red flags and other potential risks that would make you lose money. This blog post explores every critical question to ask when buying a business. Read on to learn more.
Questions to Ask Yourself Before Buying a Business
The excitement of buying a newly acquired business can lead to costly mistakes. Asking yourself the following questions before meeting the existing owner of the business owner will help you decide whether you should proceed with buying the business.
Why Do I Want to Acquire This Business?
One important question to ask when buying a company is why you want it in the first place. You want to make sure you are acquiring the business for the right reasons:
- Are you interested in getting into the industry?
- Do you have prior business experience in the industry?
- Do you think you have what it takes to make the business successful?
- Is it a viable financial investment?
If you’re unsure about your business venture, it is advisable to take the time to evaluate whether it is the right decision for you.
Why Can’t I Just Start a New Business?
A critical question to ask when buying a small business is why you should buy it instead of starting your own from scratch.
Whether starting a business from scratch or buying an existing business, you should understand that both approaches have pros and cons.
Therefore, weighing both options is critical to determine which would work best for you.
What Is the Future of This Industry?
You don’t want to buy a business in an industry that may become obsolete in a few years or even months.
Take the time to research the market before buying a business. If a new product or service about to be released will render your services undesirable, you should know about them before making a purchase. In other cases, you might look at something that’s been around for a while, like real estate.
How Much Net Working Capital Will I Need?
Net working capital (NWC) is essentially a company’s liquidity: the difference between the company’s current assets and current liabilities.
The assets may include cash, accounts receivables, raw materials inventories, and finished goods for a comprehensive inventory.
The liabilities may include accounts payable. Before buying a business, you should know how much working capital the business will need to grow.
Who Else Should I Meet After Meeting the Business Owner?
Have you already met the owner of the business plus all the employees and feel satisfied with the meeting? If so, think about other people to meet to help you make an informed decision.
Consider meeting with all the key employees, management team, customers, suppliers, and critical profitable clients. These people validate the information and help you understand the business’s success.
Questions to Ask the Current Owners
You need a lot of information from the current owner to make informed decisions about buying the business. Let’s look at some of the questions to ask to find that information:
What Are You Selling the Business?
The foremost and one of the most important questions to ask before buying a business is why the owners are selling the business. The answer will determine your next steps in the purchasing process. If you get an undesirable response, you might think twice about taking over the business.
You should be worried if the current owners explain that the company’s financial health is the primary reason for selling. However, if the seller cites retirement as the main reason for exiting the business, the chances are that the investment would be worth it.
Other common reasons for selling a business that shouldn’t raise the alarm include the following:
- Health issues
- Family obligations
These reasons usually don’t affect the business itself. If the owner is unwilling to explain the reasons for selling the business, that is a red flag. Take the time to evaluate the company.
If you discover any issues of concern, you should inform the seller about them or simply abandon the deal.
How Long Have You Been in the Business?
Asking about the length of time the current owners have owned the company will help you uncover crucial information about the business.
Longevity and day to day operations are crucial indicators of the company’s future success. This is true, especially if they are not the original owners of the business. It’s best to also ask about the previous ownership history.
What Are the Company’s Financial Records?
You should at least request and review the following records:
- Current year financial statements
- The past two financial years’ accounts (Profit and Loss and Balance Sheets)
- Last four quarters of Business Activity Statements (BAS)
- Current contracts or leases
- Last income tax returns
- List of all assets the sale will include
It’s worth noting that physically inspecting the assets during the sale process and recording their valuation is critical. If you decide to have, an independent auditor review the last income tax return, be sure to find an experienced and reputable one.
While it’s often great to trust a company’s own financial analysis, it’s advisable to ensure that accounting professionals have vetted the statements. If the seller refuses, walking away from the deal would be the right thing to do.
How Is Your Relationship with Your Customers?
Another vital question to ask when buying a business is about the company’s employee expertise and relationship and its customers. Building reputations and relationships take effort and time.
Therefore, if current customers don’t hold a company in high regard, that’s a red flag, and you may have a hard time growing the business and profits. However, you can quickly rectify business-customer relationship issues with things like loyalty programs.
Nonetheless, you should take the time to determine whether it is worth the resources it will take to solidify the customer base. On the other hand, if the company has a good reputation, you might be in for a good deal.
Will I Retain Existing Employees?
If you are only acquiring the company’s assets, you will generally not inherit staff entitlements as the new current business owner. The current owner will terminate the staff’s relationship on the last day, and it will be up to you as the new owner to decide whether to offer new contracts for how many employees there are.
Will I Be Inheriting Any Liabilities?
In company culture, one of the top questions to ask when taking over business operations is whether you will be taking on any outstanding debt . Asking this question is critical because taking on liabilities could significantly increase the asking price you will pay.
The current owners should pay any liabilities you are not assuming before finalizing the deal. The owners shouldn’t say they will clear the debts later.
Otherwise, according to the legal doctrine of successor liability, you may end up paying the liabilities yourself.
Have You Ever Had Any Lawsuits?
You want to know if the business or the owner is facing any pending lawsuits or legal obligations because litigation issues are critical in the business world. They are a good indicator of a company’s values, culture, and reputation.
Litigation can also expose you to liabilities. If the business has legal issues, you will inherit those issues as the new owner.
Do You Have Financial Plans for the Business?
Taking over a business goes beyond just handing over cash and waiting for the business to bring in profits. You must ensure that you have a solid financial plan to help the business grow.
A good financial plan should include reviewing how much profit from the cash flow statements to clearly understand income and profit loss to give you a clear picture of the company’s finances and future potential.
The financial plan will be a key reference document during the buying process and subsequent daily operations.
What Is the Annual Gross Revenue and Profit Margin?
A business owner with nothing to hide will have no problem showing the exact figures regarding the business’s projected sales.
This information will help you determine how much you can earn from the business. You’ll also know about the current overheads.
Has the Business Ever Undergone Independent Appraisal?
Another critical question to ask when buying a business is whether an independent auditor has ever appraised it. An independent appraisal is an excellent way to know how much the business is worth and a fair price to pay.
If the business hasn’t undergone an independent appraisal, it’s advisable to have one before making a purchase so you know approximately the value of the business you plan to acquire.
What Is the Competition Like?
Understanding the competition is critical before acquiring a business. It makes all the difference knowing the competitors and how they operate since this information will guide most of your decisions regarding the purchase.
Besides knowing how the business operates, you want to know what you are up against, so you can prepare yourself properly. Take the time to research other similar businesses in the area.
You shouldn’t ignore the online competition. All businesses have competition, so you need to know who is competing with the business you’re thinking about buying before closing the deal.
How Much Does the Business Depend on You?
With a particular company or business, one of the critical questions is whether the business is too dependent on the current owners. A company that heavily depends on the owner could have issues, especially if they’re retiring.
The company’s value could reduce significantly upon the owner’s exit. It’s also risky to put all hopes on an individual that could walk away without warning.
If you feel that replicating the owner’s role or automating the process would be challenging, you should rethink your decision regarding acquiring the business.
Can You Finance the Transaction Yourself?
If the current owner is willing to finance the acquisition themselves, it indicates that they believe in you and the company. Seller financing often covers 10 to 25% of the company’s purchase price, and you can add this amount to a down payment.
It’s worth noting that the current owners understand the business more than you do. Therefore, why should you gamble with your money if they are unwilling to put some funds on the line by financing the sale?
What Is the Handover Period?
The business owner usually has a significant amount of goodwill. They probably built solid relationships with their existing clients and customers when they operated the business.
This relationship can die if the owner simply walks away from the business. You can minimize this effect by including a transaction and training period in the contract.
This way, the seller can introduce you to the existing customers and answer any questions you might have about the company before exiting.
What Advice Do You Have About Running This Business?
The previous owner may have made various mistakes in market trends that you should avoid. Or they have dealt with unscrupulous suppliers you should know about. Ask for honest advice about running your own business and how to make it thrive going forward.
When buying a business, you want to ensure your due diligence process for making the right decisions, you are acquiring the business for the right reasons, and you are investing in a viable industry.
You also want to know the business’s history and financial status of the entire business you’re about to acquire and whether you’re taking on any liabilities. The best way to get all this information is by asking the right financial questions.
Now that you know the question to ask when buying a business, Sacramento has Business Brokers and a company to contact if you want to buy or start a business in the Sacramento area.