Buying a business?
Identifying the right questions to ask when buying a business is a key part of the due diligence process. Making the necessary inquiries increases the chances that you will pay a fair price and obtain the business of your dreams. You’ll need to question yourself and the seller to determine whether the business is one that can be operated profitably.
Failing to ask the right questions when buying a business can lead to the nightmare scenario of overpayment and inheriting problems that you didn’t anticipate. You should leave no stone unturned when asking questions about the health and viability of a business you’re considering buying.
Whether you’re contemplating buying a small, medium, or large business, you still need to have a list of questions to ask. Buying small businesses could be a smart choice for would-be entrepreneurs because of the number of available small business. According to the Small Business Administration, since 1982, the number of small businesses in the US has grown by 49%.
Buying an established business is appealing because it may be easier than starting from square one. However, the benefits of buying an existing business can only be realized by taking the necessary steps and making the right inquiries. If you are considering buying an existing business, think about using the services of business advisers like brokers, lawyers, and accountants.
43 questions to ask when buying a business
Even before seeking out business advisers, position yourself to gain the most out of the buying process.The following list of 43 questions to ask when buying a business will assist you in making the right decision. We’ve broken down the following list into different categories below.
Jump to category:
- Initial questions to ask yourself
- Initial questions to ask the seller
- Financial performance questions
- Value of the business questions
- How the business is valued questions
- Everyday management questions
Initial questions to ask yourself when buying a business
Buying a business is a big commitment and requires deep questions to determine whether you’re genuinely interested in that particular business. Your interest in a particular business needs to be combined with the potential for a healthy profit.
Ask yourself the following questions to find out whether you actually are sold on the business or whether you just like the idea of it:
1. Does the business have longevity? Buying a business based on a current trend could be exciting, but you must ask yourself whether there will be demand for the products and services in years to come.
2. Will I be happy doing this all day? Your idea may be to buy a business and hire a manager for the day-to-day operations. However, you’ll still need to be heavily involved in the business, especially in the early days.
3. What exactly am I buying? There are several structural options available when buying a business including a corporation, entity or just assets.
The initial questions to ask when buying a business involve answering on a gut level. You should be brutally honest with yourself to avoid making a mistake. Here are some more questions to ask yourself when contemplating buying a business:
4. What is my motivation for buying this business?
5. Would it be easier to start a similar business on my own?
6. Do I have enough experience in this field to make this business work?
7. What do I know about the competitors?
8. Am I planning to buy this business on my own or will I need a partner?
9. Can I really afford to buy this business considering my other financial commitments?
10. Can I make a comfortable living from this business?
Initial questions to ask the seller when buying a business
Just as there are some initial and basic questions you should ask yourself, there are also some elementary questions you must ask the seller when buying a business, including:
11. Why has the seller put the business up for sale?
12. What exactly does the business do?
13. What year did the business start to operate?
14. What is the history of the business?
15. How long has the current owner been operating the business?
The answers to these questions will give you an indication of whether you want to proceed, but you should be aware that the owner may not be entirely open about some answers. For instance, it’s unlikely that the owner will be forthcoming about poor business performance. You’ll need to be on alert for red flags (which could include evasive answers) to determine whether the business opportunity is worth pursuing.
Questions to ask about the company’s financial performance
It’s time to make further thorough investigations into the company’s financial performance, once you’re satisfied with:
- Your answers
- How the business owner addressed your questions
The relevant documentation should provide answers about the financial state of the business. However, you should first ask the business owner questions about the company’s financial performance. Important questions to ask about the financial state of the business include:
16. Can the owner provide evidence of the gross revenue of the business for the past three years?
17. What were the yearly net profits of the business for the past three years?
Proving the company’s financial performance shouldn’t be skimped on and you should be at liberty to ask all the necessary questions and examine as many documents as possible to help in your decision-making process. Relevant documents that may help to paint a picture of business performance include:
- Profit and loss statements
- Bank statements
- Supplier contracts
- Lease agreements
Financial statements should be readily available and presented to you in an organized way. Missing documentation or slapdash record-keeping could be a warning sign indicating that the business may be experiencing financial issues.
Questions to ask about the value of the business
The amount you pay for a business and its assets will impact on your potential success. If you pay more than you can afford and the business fails to make the necessary profits, you could lose it all. The aim is to pay a fair price that you can afford and won’t result in you being financially strained. Ask the following questions to determine the price of the business:
18. What is the asking price for the business?
19. Are there any assets included in the asking price? If so, what are they?
20. Can you justify the asking price by the profits the business makes?
Asking these questions will give you a starting point of your negotiations. If the asking price is too far above what you can afford, you need to consider whether it would be realistic for the business owner to accept a much lower offer.
It’s vital to have a detailed list of all the assets that are included in the sale price of a business. Ask questions about whether assets, like customer lists and real estate, will be included in the sale price. You also need to ask about any debts and liabilities that you would inherit since this will have an impact on how much you’ll be paying.
Questions to ask about how the business is valued
It’s recommended that a business valuation should not be higher than three times the annual net profit. Business owners have dedicated a considerable amount of effort and time into their business. Therefore, it’s not unusual for them to overestimate the price based on their commitment.
It’s your job to take the sentimentality out of the business buying process and ask questions about how the business owner reached a valuation. The facts and figures need to speak for themselves when deciding the value of a business. To be certain that you’re paying what the business is worth, ask the business owner the following questions:
21. How did they come up with the purchase price?
22. Did they use an independent appraiser or internal calculations to determine the price?
23. If an independent appraiser was used, can you see the results?
24. Would they consider negotiating in relation to the asking price?
25. What structure does the seller wish to use for the sale, for example, stock sale, or asset sale?
Questions to ask about financing the business
If you’re satisfied with the financial viability of the business and the valuation, you need to think about how you’ll finance the business. There are a number of options to factor in when considering how you’ll raise the money for your new business including:
- Private partnerships
- Home equity loans
- Small Business Administration and bank loans
This aspect of buying a business needs to be handled as objectively as possible. You’ll need to separate your emotions (especially if you’re really passionate about the business) to make decisions about how much you can afford. To help you reach a decision on affordability, ask yourself these questions:
26. Can I afford to pay for this business in cash?
27. Can I use my personal assets, like home equity, to finance this business purchase?
28. Can I get money for a deposit?
29. Is my credit score high enough for me to qualify for the necessary financing?
30. Would the experience listed on my resume help to convince lenders of my suitability to operate this business?
You may be able to explore some financing options with the business owner. Seller financing is where the business owner gives the new buyer a loan for all or part of the purchase price.
The benefit of seller financing for you is that you have access to more capital while the business owner is able to secure more interest in the sale of their business. Given that seller financing could be a viable way to raise money to buy your business, it would be prudent to ask the business owner the following questions:
31. If seller financing is an option, how much is available?
32. Can a list of terms and conditions of the seller financing be provided?
33. If the business owner doesn’t offer a seller financing option, how long will they wait for you to secure external financing?
Ask questions about the everyday management of the business
Ideally, you’ll already have some experience in the industry of the business you want to buy. Even if you’re an expert in the particular field, you’ll still need to ask questions to find out how that particular business operates on a day-to-day basis and how exactly money is made. The more in-depth understanding you have about the business operations, the quicker you can start to make money. Ask yourself the following questions to gain a better understanding of daily business operations:
34. Will I include myself on the payroll straight away?
35. Are the business and the owner intrinsically linked?
36. How many employees work for the business?
37. What is the team dynamic like among the employees?
38. How can I get third-party verification from vendors and employees about the viability of the business?
To understand how exactly the business is run day-to-day, you’ll need input from the business owner. Ask the business owner the following questions to get a better idea of what you’ll be getting into if you buy that particular business:
39. Describe the revenue model of the business.
40. If the premises are leased, when does the lease expire?
41. What business development strategies do they have in place to secure new customers?
42. Please provide an organizational chart of your employees, detailing their roles and functions.
43. Will they be willing to make themselves available for a specified amount of time after the sale of the business to help with troubleshooting?
Further due diligence
It’s best to always assume that there’s something that the business owner isn’t disclosing because you didn’t ask. Here are some other factors to consider when buying a business:
- Personal issues, such as a divorce, which affects the ability to sell the business
- A proposed (or current) zoning change
- Non-renewal of a new customer account
- Pending litigation against the business
It’s your responsibility to do your due diligence when buying a business. It’s a case of ‘let the buyer beware’ when finding out how much the business is worth and how much profit you will make. During the business process, you not only need to ask the right questions, but you also need to be clear about acceptable answers, supported by evidence.
For example, business owners may claim that the business makes large amounts of unreported cash, which you’ll benefit from. Such answers to your questions should be a red flag because it indicates dishonesty. A rule of thumb when evaluating a business to buy is that, if something isn’t recorded, then it doesn’t exist.
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