Starting a business is one thing, but buying an existing business is something unique. It might seem easier than before but it requires a lot of Proper Vetting. Knowing what to ask when buying a business can help you avoid costly mistakes and ensure you’re making a smart decision.
Today, we’ll dive into the must-ask questions when buying a business. You’ll learn about key financial questions to ask and important due diligence inquiries for the seller or broker.
Essential Questions to Ask When Buying a Business
When you’re considering buying an existing business, it’s crucial to ask the right questions to the current owner. They will help you gain valuable insights and avoid costly mistakes.
Q1. Why are you selling the business?
This is one of the most important questions to ask a business owner. Their answer can reveal a lot about the company’s current state and prospects. It might change how you approach making changes to the business or even make you think twice about the purchase.
Q2. What’s the history and outlook of the business?
Understanding the company’s background, including its founders and key management, is crucial. This information will help you assess the long-term viability of your potential investment.
Q3. How’s the customer base?
Ask about the target market and whether it’s growing, stable, or shrinking. Find out if the business relies heavily on a few key customers and what would happen if those customers left.
Q4. Who are the main competitors?
Ask about primary competitors, and their success rates, and what they are doing better or worse than their business.
Q5. What’s the company’s reputation?
While you have to research the company’s standing in the market, with social media, online ratings, and review sites, you can also ask the owner about it. This can give you some insights into how he looks at their business.
Q6. How’s the employee situation?
Of course, you will inquire about employee wages etc. but understanding the company culture is also important. You also need to see what the current staff is thinking about the ownership change.
Financial Questions to Ask When Buying an Existing Business
Now, let’s come to the main technical questions that require more than just a meeting. Of course, you have to look at the Profit and Loss statements, Tax Returns, Cash Flow statements, Balance sheets etc. But after you have thoroughly reviewed them, you might want some more financial insights from the owner of the business.
Q7. How was the asking price determined?
Understanding how the seller has valued their business can reveal its true worth and give you an edge during negotiations. Ask about factors like historical financial performance, asset values, and current market conditions that influenced the asking price.
Q8. What’s the company’s debt situation?
Understanding the company’s financial obligations is crucial for assessing its overall health.
Q9. Is there enough working capital?
Conduct a working capital analysis to assess the business’s liquidity. This will help you determine if the company has enough cash to pay its bills at different periods.
Q10. What’s included in the sale?
Clarify which assets are included in the purchase price. Physically inspect each asset and record its valuation. Also, ask about any intellectual property, proprietary processes, or exclusive products, and whether the ownership rights will transfer to you.
Q11. Have you prepared a post-close budget?
This is the question you have to ask yourself! Create a detailed post-close budget that forecasts revenue, profit, and debt coverage. Account for unexpected expenses and price increases that may come up following the acquisition.
Q12. Are the financials up-to-date, clean, and clear?
Don’t take financials at face value. Look for unreconciled accounts, personal expenses, or mismatched books and tax return figures.
Q13. What additional costs should I factor in?
Consider the cost of any additional services you’ll need, such as legal fees for contract review or funds for inventory and other expenses. By accounting for all costs, you can ensure you’re getting a fair deal.
Due Diligence Questions for the Seller or the Broker
When buying a business, conducting thorough due diligence is crucial to make an informed decision.
Q14. Are there any other investors or owners?
Is the seller the sole owner, or are there other investors? If there are other stakeholders, find out if they’re selling their shares too and how much of the company is for sale.
Q15. Has there ever been a lawsuit against the business or the owner?
As the new owner, you’ll inherit any ongoing legal issues, so it’s crucial to be aware of them.
Q16. Will you sign a non-compete agreement?
Ask the seller to sign an agreement not to compete for a specified period (e.g., 3-5 years). This is particularly important if the seller’s personality is a key factor in the business’s success.
Q17. How is the company’s intellectual property protected?
For businesses where intellectual property is a valuable asset, confirm that all trademarks, patents, copyrights, and business names are properly registered and protected.
Q18. What about Licenses and permits?
Ensure the business has all necessary licenses, permits, and certifications from industry organizations.
Specific Questions when buying a small business
All the above questions cover the essential information, but there are some more queries that you can look into, so, you don’t miss anything.
Q19. How many employees does the business have, and what are their roles?
Q20. What are the day-to-day operations like?
Q21. Who are the key suppliers and what are the terms of their contracts?
Q22. What’s the customer retention rate?
Q23. Are there any long-term contracts with customers?
Q24. What’s the business’s unique selling proposition?
Q25. What’s the current market share and is there room for growth?
Q26. Are there any upcoming market trends that could affect the business?
Q27. How old is the equipment and when will it need replacing?
Q28. Are there any untapped markets or potential new products/services?
Q29. Are there any key employees crucial to the business’s success?
Q30. Are all necessary licenses and permits up to date?
Remember, it’s always advisable to work with professionals such as accountants, lawyers, and business brokers when considering a business purchase. They can help you conduct due diligence and ensure you’re asking all the right questions specific to the business and industry you’re interested in.
Conclusion
Buying a business is a significant decision that requires careful consideration and thorough research. The questions outlined in this article serve as a valuable guide to help potential buyers navigate the complex process of acquiring an existing business. Remember, each business acquisition is unique, and the questions you ask should be tailored to your specific situation.
