Questions to Ask When Buying a Business
If you are thinking of buying a business, congratulations! Owning your own business is a fantastic way to achieve the American Dream. However, before you hand over any cash or start checking out the banks that could assist your future business, it's essential to ask the right questions first.
In this article, we will discuss the essential questions you need to consider when buying a company. These questions will test your readiness to venture into a new business. They will also extract everything you need to know about the seller's business practices, successes, and risks. Let's delve into questions to ask when buying a business.
Questions About The Business Itself
Besides asking questions about the financials and the company's history, the first order of business is to ask those that provide information on how the company that’s up for sale is currently operating.
These questions will give you an idea of what it's like working in this particular industry and help guide your decision-making process regarding the purchase of the business.
Why Are You Selling Your Business to Me?
The best way to start a conversation with the seller is with a direct question. It might appear blunt to ask the business seller why they are giving up on their hard work. That said, when buying a business, questions like this can reveal a lot about it.
The seller could be honest and say that they achieved the maximum they could with the company and felt it's time to move on to something new. They might be in a situation that requires a different business plan. If the seller gives you an unclear answer, they may be hiding something. Trust your intuition here, but don’t be afraid to ask the seller some follow-up questions, too.
When Did You Purchase This Business?
By analyzing the past, you can gain excellent insight into how long your newly acquired business will last. It should be one of the first questions to ask a seller when buying a business. That is why checking a company's history can give you hints about its longevity on the market and is a good indicator of your chances for continued success. That said, just because the owner had a long-lasting business doesn’t mean it’s guaranteed to work the same way for you.
Why Did You Buy It in the First Place?
With this question, you can see how the seller's mind works. It will also help you clear up your incentive to take this company upon yourself, especially if it will involve plenty of your time investment.
What Is Your Current Business Plan?
If you ask about business plans, the seller can divulge planned expansions and business development ideas. If you’re stumped on what questions to ask when buying a business, checking the scope of the seller's business plan can tell you why they are abandoning their current company or small business.
How Does Your Company Generate Income?
Time is money; hence you'll need to find out how you'll get compensated. Specific businesses have out-of-the-ordinary methods of creating income. It could be through a subscription, one-time fee, or something else entirely.
Can You Tell Me About Your Crucial Employees?
It's tough to find good help, and hard-working employees with a good performance track record can help kickstart a new business venture. You'll want to keep these employees working for you. It is one of the good questions to ask when buying a business, as their knowledge and years of experience can add a lot to the growth of your business.
How Fast Does the Business Get Paid for Goods and Services?
You have to consider many factors when deciding if you want to buy a business. One of the often-overlooked ones is the time to get paid after finishing a job. If the previous business owner had a significant delay in getting paid after delivering the goods, it could indicate a supply chain problem.
Questions About the History of the Business
It's always wise to ask the seller about any previous events or circumstances that may have impacted the business. These include anything from a natural disaster to a lawsuit. It is one of the most important things to consider when buying a business if you don’t want to be unpleasantly surprised when combing over the books at a later date.
The goal is to understand how well the company has weathered past storms. With the right questions, the seller might just give you invaluable tips on avoiding the company's past pitfalls.
Am I Picking Up Any Liabilities With This Business?
You'll need to make sure you're not inheriting any undisclosed debts when purchasing a business. Ask about the property mortgage rate, long-term commitments, contracts with clients, or "buy now, pay later" equipment purchases.
Keep in mind that when you take over someone's business, you're also taking over their debts, so this should be one of the questions to ask when acquiring a company. If the seller tells you that they'll pay the debts later, it should be a giant red flag.
Are There Any Earlier or Unresolved Lawsuits?
Another red flag is if the company has any active lawsuits which could put your finances in peril. Legal expenses and previous damages done to the business' name may be too much to ever successfully recover from.
Do I Need To Acquire Any Permits or Licenses?
A good number of companies have an ongoing industry-based license or a permit. Hence, one of the legal questions to ask when buying a business is whether there are any licenses or permits that you need to purchase or renew. Otherwise, you could land in legal hot waters if you don't care about this issue.
Who Are Your Competitors?
One of the biggest mistakes you could make is to skip on investigating the market competition prior to your purchase. Do your own research first, but also check with the seller - they may be able to give you some handy tips.
Can You Offer Advice on Conducting This Business?
The previous owner has a unique experience and perspective on running a business. Feel free to ask them for an honest opinion about conducting this business and how to make it grow in the future.
They might reveal problematic suppliers or ineffective marketing strategies they tried out, which is invaluable info. This should be one of the initial questions to ask when buying a business after inquiring about the company itself.
Questions About the Financials
Next, you want to focus on financial questions. One of the most critical ones is how much money the company is making and where that money comes from. In order to make an informed decision about purchasing a business, it’s essential to have a complete understanding of how its finances work.
What Is the Company's Yearly Gross Revenue?
You have to know how much you can earn through your chosen business and what the ongoing company expenses are. A seller needs to be forthright with this data by showing you profit margin figures, making this one of the most important financial questions to ask when buying a business. If they seem cagey and try to deflect your question, it’s a sure-fire sign that this business may not be worth purchasing.
What Was the Profit Margin in Recent Years?
If the profit margins are slim compared to gross revenues, the business most likely has significant active expenses. Don’t settle for just asking the current owner, though: getting a professional and independent auditor to check the financial books and tell you the company’s situation should be your highest priority.
What Is Your Asking Price for This Business?
The aim is to get a ballpark figure and haggle with the owner if the price is worth negotiating over. As simple as it sounds, this is one of the first and best questions to ask when buying a business. The asking price should generally be up to three times the yearly profit figures. Also, be sure to research similar companies in the area, price range, and market to get a feel for how realistic the asking price is.
Why Are You Asking for This Much?
This is another very direct question that will help you determine how the seller thinks, providing they are honest. It will also tell you whether you trust this person enough to conduct business with them.
What Company Assets Will I Acquire?
You'll need to evaluate everything you're getting when purchasing a business, preferably with a good task management tool. For this reason, one of the questions to ask the owner when buying a business should be regarding asset acquisition. The answer needs to tell you about the assets in detail: equipment, a client list, and delivery or business vehicles. It should also include intangible assets like social media accounts and goodwill.
Did You Run an Independent Business Appraisal?
The seller can do their own business evaluation to get an idea about a fair asking price. Otherwise, an independent auditor can comb through their finances and assets to determine if the asking price is too high. You can be much more confident in a seller who doesn’t mind an independent evaluation. That's why it's one of the more important accounting questions to ask when buying a business. Both the seller and the buyer may ask for an independent appraisal at any time before the transaction is concluded.
Can My Auditor Check Your Books?
An honest seller won't mind if you hire a competent and independent auditor to run a financial analysis on their business. That includes checking the finance books for balance sheets, tax returns, investments, active leases and contracts, income and cash flow statements. An ideal analysis should cover at least three to five years of prior business operation, up to the current date.
Questions To Ask Yourself
You've done an extensive study of what you were getting yourself into when you decided it’s time to buy that arcade shop or manicure business. However, the list of questions to ask before buying a business shouldn’t include only those directed at the current business owner.
Buying and investing in a new company is no small feat. You need to take a good look at everything and think long and hard about whether becoming a business owner is the right career path for you. Asking the following questions and giving yourself an honest answer can help with that.
Why Do You Want To Acquire This Business?
Take some time to run through all the obvious and hidden reasons for buying a particular business. These reasons must be compelling enough to motivate you to put the maximum effort into running the company properly.
Maybe you like working in a specific industry, or it looks like a sound investment. Or it could be an online store you loved visiting and now want to take over and improve by increasing conversions and giving it your own unique spin. On the list of questions to ask yourself when buying an existing business, your motivation to buy a particular venture is perhaps the most important one. Whatever the reason is, it must be strong enough to motivate you to push through any difficulties that running it in the future may bring.
Why Don't You Start Your Own Business?
You need to be sure you’d rather tackle running an existing business than do your own thing from the ground up. Perhaps you want to continue the company's legacy and values, or you want to change it into something new and exciting. If you like the niche but feel that the business itself would need a complete rework, maybe starting your own venture is a better idea.
Do I Have a Solid Financial Plan To Present to Potential Lenders?
Having a bullet-proof financial plan is crucial to developing your business and making the company profitable. As such, this is one of the most helpful questions to ask yourself when purchasing a business. A solid financial plan will attract potential lenders to assist you, especially if you end up needing a loan on a suboptimal credit.
Who Else Do I Need To Contact?
If buying the business goes well, you need to start thinking about the next steps. Do you have a list of people you want to reach? Will you be using customer relationship management software? Scheduling a meeting with employees, suppliers, clients, customers, and other business-related contacts will help alleviate any potential concerns they may have about the new management.
The questions listed above are just a starting point. Be sure to ask other questions specific to the business you're interested in and the industry it operates in. Buying a business is a big decision, so make sure you have all the information you need before moving forward. By asking the right questions, you'll be able to make an informed decision that will go a long way towards making your next business venture a success.
One of the first questions should focus on the seller’s asking price and why they are asking for that much. It is a good starting point to check if they’re willing to negotiate the price. These questions will also give you an insight into the seller’s financial reasoning and reliability.
You should always check with the seller why they want to sell their business to see if they’re truthful and determine what you’re getting yourself into. This leads to the next question: “Am I picking any liabilities with this business?” which will let you know about a potential property mortgage rate, long-term commitments, contracts with clients, or "buy now, pay later" equipment purchases.
Don’t forget to check the company’s financial status. Ask about the company’s yearly gross revenue to determine how much of the profit you can expect in the beginning. Lastly, ask yourself why you want to acquire this business. You’ll need good enough reasons to help you get through any adversities you may face while managing the company down the road.
There are a lot of important questions to ask, but you should focus on the business history and financials, along with the seller’s reason for passing on the business to you.
There are a lot of questions to ask when buying a business. Start with your plans and expectations for the company you want to acquire. Ask yourself if the reasons for buying the business are valid enough to keep you going in the first few years. Make sure to go over the business history, its financials, and success in recent years, so you can get a better idea of how it will perform in your care.
Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.
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