20 Important Questions to Ask When Buying a Business
You’ve found the business of your dreams. Now, it’s time to find out if it’s too good to be true. Liking the premise of the business is one thing, but you’ll have to ask the previous owner, and yourself, some hard-hitting questions to make sure that you’re doing the right thing.
You’ll want to be absolutely clear on the following 20 questions about buying an existing business. Use this blog as a checklist to find out the important financial, operational, fiscal, and day-to-day information about the business you’re thinking about buying over.
Personal questions for yourself
Before meeting the business owner, you’ll want to do your homework. Thinking long and hard about the following questions might reveal that it isn't for you after all.
1.Why exactly do I want to buy this business?
You want to be extra sure that you’re buying the business for the right reasons. Do you want to buy it because you like the industry? Do you have previous ownership experience in the industry, and you think you can make this business work the same way? Is it simply a good financial investment?
2.Why do I want to buy this business instead of just starting my own?
Perhaps the business is already well established, and you feel that you’d rather follow in the footsteps of the previous owner. Or, you’re certain you have what it takes to step into this business and transform it for the better. It may be a great addition to a business you already own. Or perhaps, it may be better for you to simply start from scratch and create your own business.
3.Who else should I speak to after meeting the seller?
If you meet the owner and you’re satisfied with the outcome, consider meeting with customers, employees, suppliers, and important contract clients to verify the information you’ve gathered and to hear a second opinion.
Personal questions for the owner
You don’t have to interrogate the current owner, but there are some personal questions you’ll have to ask before delving deeper into the business questions.
4.Why are you selling the business?
Follow your intuition to assess how genuine and reasonable their response is. It may be that they’re moving on to a new opportunity that works better for their particular situation, or they’ve built the company as best as they can within their potential and now it’s time to retire.
You might get an inkling of current problems the business is facing, which isn’t always a bad thing so long as you are being told an honest overview of the situation.
5.How long have you owned the business?
The length of time that the current owner has owned the business will reveal a lot about the company. Longevity is a great indicator of the future success of the business, especially if the business wasn’t originally theirs to begin with. Asking about the previous owning history is a good idea too.
6.How many hours do you spend on the business per week?
Ask for their timesheet, as well as their typical weekly/monthly activities within the company to gain a better understanding of what your role will look like as the new owner.
7.How much of the business’ success do you attribute to personal loyalty rather than business loyalty?
Is customer retention high because of the owner’s personality, or because of the services? This is a particularly important question to ask if you’re buying a family-run business.
Of course, most businesses will have loyal customers who are used to things being the way they are, but it’s very difficult to duplicate the same experience under new ownership if you’re planning on changing things.
8.How much do you currently pay yourself?
As a fellow entrepreneur, the current owner will understand that you’ll want to know how much you can expect to earn.
Questions about the asking price
Complete thorough due diligence to gain a real insight into whether or not this will be a profitable venture or a future regret. Here, you’ll gain a better understanding around how the current owner has arrived at their selling price, and how well valued this figure is.
9.What is the yearly gross revenue and profit margin?
An honest seller will not hesitate to show you the exact figures regarding the profit margin of the business. You’ll want to know how much you can earn from this business, as well as what the current overheads are.
10.How healthy are the books?
Along with an accountant or financial advisor, scrutinize the past three to five years’ financial statements. Look at tax returns, cash flow statements, balance sheets, contracts, payroll, and investments to make sure everything is financially sound.
11.Has your asking price been appraised by an external auditor?
It’s possible that the current owner will have his own personal valuation, and an evaluation completed by an independent auditor. If these figures are significantly different, it may give you an indication that there’s more going on beneath the surface.
You may choose to trust the audit completed by their auditor, or you can have one completed by someone you trust. Regardless, the auditor’s price will be the most reliable figure to use to begin negotiations around how much the business is worth. As well as this, conduct thorough market research on how much similar businesses have recently sold for.
12.What liabilities are attached to the business?
If there are any pending debts tied to the business, the owner should disclose them now. You should also find out about the mortgage rate of the business premises, equipment bought on hire purchase (buy now, pay later), long-term contracts with existing clients. You’re entitled to negotiate if the current owner will pay out any standing debts before you take this business on.
13.What assets come with the business?
This includes both tangible (things like delivery trucks, equipment) and intangible (goodwill generated, social media accounts) assets of the existing business. You want a comprehensive inventory of every single thing you’ll be getting in the sale [2]. Another important asset to enquire about is the list of profitable clients.
14.What is your goodwill valuation of the business?
The goodwill value is the amount that someone is prepared to pay for a business above and beyond the value of its assets. This might include the strength of a business's brand, reputation, employee expertise, customer databases, and any other aspects of a business that add value to a buyer [1].
Questions about business operations and legal obligations
You should now know what this business will cost, and how much money it can generate. It’s time to move on to what you’ll be able to do as the new owner.
15.Does the business have any previous or pending lawsuits?
If the business for sale has a history of legal trouble, this will set red flags waving. Inheriting a business with a poor reputation or known bad-practices can be difficult to recover from financially, and could impact your future business ventures.
16.What permits and licenses will I have to renew?
Most businesses have some sort of licensing specific to their industry. Asking the current owner about this will save you a significant amount of time and possible legal trouble down the line if you don’t comply with the correct permits and licensing laws.
17.What does your current business plan look like?
The seller may let you see their current business plan, which will give you an indication of projected business development and expansion that hasn’t already been disclosed. This might also tell you more about why the current owner is leaving.
18.Who are the key employees?
Good employees can add an incredible amount of value to a business. If you’re planning on replacing some existing employees, remember that they likely have years of experience in that company that you don’t, so their knowledge and understanding of the operations is not something to underestimate.
19.Do you have a plan on how you’d like the sale to be financed?
Most small business lenders insist that sellers take a standby position for about two years [3]. This is when the buyer takes a loan to cover during the settling-in period of the business. In some cases, the seller will finance a loan themselves, known as seller financing. You must weigh up whether financing or an all-cash deal would work in your best interest.
20.Do you have any advice for running this business?
Perhaps the previous owner has made grievous marketing mistakes, or has worked with a dodgy supplier in the past. In good faith, ask for honest advice about running this business and advice on how to help it flourish in the future.
Secure your business’ future
If you’re satisfied with the previous owner’s answers and you’re ready to buy your business over, you’ll want to take all the necessary steps to achieve the best possible success with it. Invest in technology that is designed to streamline the day-to-day operations of your company, while simultaneously giving you an overview of long-term reports and results.
Using a dedicated point of sale (POS) system will provide resorts that illustrate every financial aspect of your company. From quarterly revenue to profit margin per individual stock item, you can utilize these findings to make sure you walk into your new business with your best foot forward. Not only that, but with Epos Now you can also:
- Review employee salaries and schedules
- Track inventory with real-time updates for ultimate precision
- Integrate with over 100 apps
- Link your sales directly to your accountancy and bookkeeping software for simplified money management
- Formulate or receive invoices directly from your POS
- Create stunning customer outreach communications
- Accept a huge variety of payments, via card, cash, or online payment processing
To find out more, request a free callback from Epos Now today