Key Questions to Ask When Buying a Business

a man in a suit handing a key to a woman

The process of buying a business can be daunting and overwhelming. It is nerve-wracking to put a lot of money into a company you’re unfamiliar with, especially if it’s in a field where you don’t have much knowledge or experience.

It is crucial to ask as many questions as necessary for you to fully understand the business you are buying. The first step in your business plan should be to investigate and learn as much as possible about the business venture you are pursuing. Study the company’s finances, business model, history, and company culture thoroughly.

To that end, it’s important to be well-prepared with a list of questions to ask any prospective sellers to guarantee you have all the details that you need to make an informed decision.

Some of the topics you might want to ask about include current relationships with customers, the standing with multiple suppliers, potential legal issues, upcoming changes in regulations, former challenges, and so on.

Inquiring into the various aspects of a potential business purchase helps you set realistic goals and objectives from the beginning. In this article, we will discuss why it is important to ask a variety of questions before buying a business and some of the questions you should be sure to ask.

Questions to Ask the Business Owner

If you are going to invest your money, you should learn as much as possible about the business’s history and present situation. With any luck, you’ll get an open and frank account of the owner’s past mistakes and any current challenges they are facing. Ideally, they’ll provide you with helpful advice on how to avoid repeating their mistakes to gain a competitive advantage.

Furthermore, to determine if the valuation of the business is fair, it is important to ask the right questions. With this knowledge, you can avoid overpaying.

Consider asking the following questions of the current owner:

Why Are You Selling the Business?

This is one of the most crucial questions to ask when buying a business. Depending on the response, you may decide to rethink buying the business.

One warning sign is when the seller mentions financial difficulties at the company as the primary reason for selling. On the other hand, the business could be a great opportunity if the owner is exiting the market because they plan to retire or another non-financial reason.

Moving to a new area, wanting to focus on family, suffering health problems, changing careers, and other similar reasons are all sensible grounds for selling a business. These should be purely personal and have nothing to do with business operations.

If the seller becomes evasive when asked about the business’s balance sheets or why they’re selling, that’s a red flag that needs further investigation. Should you find anything unfavorable, express your concerns to the business owner and demand an explanation or back out of the sale.

How Many Hours a Week Do You Spend Working?

Take this as a rough estimate of how much time and effort running the business will require. Any business owner, no matter how dedicated they are to their work, needs a break now and then.

That’s why you should inquire with the current business owner about their work hours. You need to know the details before you commit!

How Long Have You Owned the Existing Business?

How long the current owner has been in charge of the company might tell you a lot. A business’s longevity is a strong predictor of its future success, especially if the owners didn’t start the company themselves. It’s also an excellent idea to ask about the business’s former owners, if there are any.

The longer a company has been in operation, the more secure your investment will be. They probably have a devoted customer base, a respectable name in the community, and a secure financial footing.

On the other hand, new businesses typically have lower ongoing costs and greater potential.

Still, the number of years a company has been in operation is an excellent gauge of its stability and reliability.

What Is the Profit Margin?

A trustworthy seller will reveal the business’s profit margin, income statements, and tax returns without hesitation. Pay special attention to the numbers in financial statements to learn how much profit you can potentially earn.

Having a large gross revenue amount without a proportionate profit margin is a sign of excessive overhead costs – which should serve as a major warning.

If you’re seriously considering purchasing a business, have its financial statements audited by a third party. An independent auditor will conduct a thorough inspection of the financial records to verify the accuracy of the owner’s statements.

What Are the Liabilities of the Business?

It’s possible to take on additional, hidden liabilities when you buy a company. The company’s existing owner must reveal any outstanding debts and legal obligations that have anything to do with the business. If there are excessive liabilities, your costs may skyrocket. This is a crucial question to ask to make sure everything is out in the open.

Before finalizing the sale, any debts that you are not taking on must be settled. Don’t believe the current owner when they say they’ll deal with it later. Due to “successor liability”, a legal doctrine that states a buyer of a small business is responsible for the debts of the previous owner, you will likely be responsible for making any outstanding payments.

You should also learn the mortgage rate of the company’s property holdings, the terms of any purchase agreements for company-owned equipment, and the details of the company’s existing contracts.

It’s within your rights to try to work out a deal with the current owner. If you don’t want to take on their debts, make it part of the contract that they need to settle any outstanding liabilities before you take over the business.

What Assets Come With the Business?

Get a comprehensive inventory of the company’s fixed assets. They should disclose purchase dates for the assets they hold so that you can get a sense of the age of the equipment and how much longer it will last. This will also be useful for gauging the assets’ depreciation, condition, and residual value.

Inquire about the lease agreements for any equipment or buildings used in the day-to-day operations of the business. A detailed list of everything included in the sale is essential. The company’s roster of profitable clients, social media accounts, and intellectual property are other assets worth exploring.

How Do You Generate Revenue?

If you’re considering buying a company, among the most important things to find out is how the business generates revenue. Where do they market their products or services? What are their delivery methods? How do they get paid? Without familiarity with the entire sales cycle, it is extremely difficult to achieve revenue synergies.

It’s important to understand the payment structure, whether it’s a one-time fee, a subscription, or something else. Depending on the business, you may be unfamiliar with their particular methods of bringing in money.

Who Are Your Competitors?

It’s essential to be aware of your potential future competition. Learning who they are and how they work is crucial for making sound decisions. Many moving parts contribute to making a business profitable. Understanding its inner workings isn’t enough; you also need to be aware of your rivals in order to stay ahead.

Find out who your local competitors are and what they’re offering before finalizing the business acquisition.

Are There Any Lawsuits Pending?

If there are ongoing lawsuits against the company, this could be a warning sign to not buy the company. It may tell you a lot about the company culture, morals, ethics, and, most significantly, its standing in the community.

Pending lawsuits can leave you on the hook for liabilities after you’ve acquired the business. If a company is known to engage in questionable practices, buying it can be financially devastating and may limit your future business opportunities.

Questions to Ask Yourself

The answers to the following questions may help you decide whether or not buying a business is the right choice for you.

Why Do I Want This Business?

You can learn more about your true motivations by asking yourself this question. The business world is competitive and demanding, so be sure you have the right reasons for diving into it. Maybe it’s a great investment opportunity, an industry you’re passionate about, or a business you regularly support.

Having a compelling motive for purchasing an existing business is crucial. You’ll be putting in a lot of time and energy to make sure the company runs smoothly, so there should be a payoff for your efforts.

It’s also important to consider the challenges you’ll face regularly. For example, have you thought about whether you have the tolerance to handle irate customers? Do you enjoy spending time with people and have good leadership skills?

Do I Want to Buy an Existing Business Over Starting My Own?

Both launching a new business and purchasing an existing one has their advantages and disadvantages. Think carefully about each choice and choose the one that seems most suitable for you and your situation.

Maybe an existing company has already built a solid reputation and enjoys positive brand recognition so you prefer to continue their path. Or you are confident that you’re cut out to enter this industry and can make positive changes to the way the company does business. It may just be a great addition to your current business portfolio.

In contrast, you may be better off creating a brand-new company from scratch if you have a really specific vision.

Do I Have the Skills and Knowledge to Be Successful in This Industry?

Companies that do well are usually led by people who are good at what they do. If small business owners don’t know the ins and outs of their industry, they can’t grow. You also need to have some background in small business administration in order to be successful.

If you want to buy an existing business, you should think about whether or not the industry it competes in is one you know well enough. You can have more faith in your acquisition if you know something about the industry, and you’ll also be better able to steer the company toward business success.

Examine your education and skills to ensure you have what it takes to successfully run the firm you’re considering buying. If you’re planning to acquire a restaurant, for example, you should probably have some prior experience working in the food service industry.

How Much Have Similar Businesses Sold for Recently?

Finding out what a business of a given type would sell for in today’s market is critical to making sure you are getting a good deal. To determine a fair purchase price, it is advisable to investigate or inquire about the sales value of comparable small businesses.

To do this, visit the county records office and inquire about similar businesses recently sold in the neighborhood and their sales price. You can also find more information about the ideal asking price online or by consulting a local business broker.

Can I Afford This?

Don’t take on more than you can handle or you’ll wind up in trouble later. Aside from the initial investment, you need to know how much working capital you need for paying key employees, the mortgage or rent, utility bills, and more.

Think about how much you can invest in the company based on your cash flow statements. The down payment is often between 10 and 20 percent of the total price, so save accordingly. With this rough estimate in hand, you can plan your finances more effectively.

Your business future will be affected by how much you pay to acquire a company and its assets. All could be lost if you overextend yourself financially and the company is unable to generate sufficient earnings. The goal here should be to make a purchase at a price that doesn’t put an undue burden on your wallet. It is also beneficial to plan for unexpected expenses after the purchase.

Why You Should Hire Business Brokers

Buying a business is a challenging and time-consuming endeavor. Sure, anyone with the capital can make a business purchase; however, doing it successfully demands significant research, time, and energy.

If you are already the owner of an existing business, you must give that company your full attention while you search for a new one to buy. Working with an experienced business broker can be helpful during this time.

A business broker is a professional that can help you buy or sell a company. They will handle every aspect of purchasing a business on your behalf. For example, they’ll review financial documents and prepare the paperwork needed for the transaction.

As part of their services, the brokers would also go out and look for promising businesses to invest in that fit your specifications. They investigate the company extensively to make sure it is a sound investment and act as an agent on your behalf.

Contact Armen Nazarian Business Brokers Today!

If you’re eager to purchase a business, but are finding it difficult to conduct your own research and due diligence, we are here to help. This is a significant investment, so naturally, you want it to go well, which is why you can rely on Armen Nazarian Business Brokers.

Together, we can narrow down your options and choose the most promising company to buy. Get in touch with us at (248) 231-7714 to discuss any of our current listings.

Leave a Reply

Your email address will not be published. Required fields are marked *