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Buying a business is an exciting process that can be an efficient way to enter a new market or segment. However, when acquiring a new-to-you venture, you assume full responsibility for the ins and outs of the business, the opportunities, and the challenges.
The first step to taking over an existing business is researching the company you want to buy. Thorough research starts with knowing what questions to ask before buying a business.
The complexities of buying a business also make it worthwhile to engage a trusted accounting partner or lawyer to help sort out the purchase details. Asking pertinent questions can assist you in getting all of the information you need and understanding the business you’re considering purchasing.
There are many questions to ask when beginning the process of taking over a business. Once you’ve signed a non-disclosure agreement (NDA) to protect your interests and the seller’s proprietary information, you can get started with general buying-a-business questions.
After introductions, this question can provide critical insights into the seller’s motivations for trying to exit or the business’s challenges. The answers can paint a picture of your future experience if you buy the business and whether it will be worth your time and money.
There are many complex reasons to sell a business or continue working on it. Don’t be afraid to dig a little deeper if you receive a standard answer about looking to retire or wanting to see something new. Is there a reason they are looking to exit the business at this particular point in time?
Before you agree to assume responsibility for the business and its assets, it’s helpful to know the business’s history. Is the current owner also the founder, or did he purchase it? If so, how long ago? Has the business model changed at all during that time?
These questions give information about how long the business has been around, its growth trajectory, and an overview of any significant changes over time.
When buying a business, questions about the business’s financial status are essential. You’re hoping to acquire something you can grow and increase cash flow, and uncovering potential issues beforehand helps ease that process.
Understanding the entire financial picture of your acquisition target should be top on your list of what to know before buying a business. Reviewing the historical financial statements for the business, as well as any projections for the future, is essential information before an acquisition. This detail will let you base decisions on data and understand what’s happening (and what has happened in the past) in the business.
A review by an independent third party, such as an auditor or other financial expert, can confirm the reliability of the company’s financial records and help you assess the actual value of the business.
Is the company generating stable cash flow, or is it bleeding cash? Part of access to the financial statements means visibility into the cash flow statement.
Cash flow may be a low priority for a strategic acquisition; instead, you may be after the technology or customer lists. But without a clear path to positive cash flow, you may be purchasing an asset that needs an additional cash injection over the short term.
Some businesses rely heavily on specific buildings, machinery, equipment, and intellectual property.
Which of those are part of the asking price? The seller should provide a complete list of all assets, including physical equipment, intellectual property, and intangible assets like customer lists or trade secrets.
Information about the company’s legal structures is an essential question when acquiring a company. This step will help you avoid expensive mistakes and give you confidence in your purchase.
While not necessarily a deal-killer, pending lawsuits can be a big red flag. A legal battle can rapidly consume a lot of energy and financial resources, even if the company has done nothing wrong.
If there are no ongoing lawsuits, information regarding historical cases (and their outcomes) are other critical questions to ask when buying a business.
Businesses in specific industries may face increased rules or regulations either on a local or national level. What rules, regulations, zoning, or other requirements are the business subject to? Does the business currently follow all applicable regulations?
Be sure to ask if there are any proposed or coming changes to any regulations that could affect the business as well. The current owner of the business should be aware of any regulatory changes, but it is always advisable to confirm with a lawyer knowledgeable in the industry to confirm the situation.
A successful business needs robust sales processes and steady revenue streams. A strong brand and growing market are also a plus and can make your life as a new owner much more manageable. To understand the sales and marketing functions, there are some crucial questions to ask when taking over a business.
Knowing the total market size can indicate the potential of the business. In many cases, even a tiny percentage of a massive market is sufficient for a great company.
Further, understanding how demand for the company’s products and services has developed in recent years might help you know where the business is regarding its overall lifecycle. A relatively new company with growing demand may have loads of potential, while another decades-old firm with waning growth might require massive changes. However, waning demand may mean there’s potential for someone new to come in and make changes.
Sometimes, businesses owe their success to a charismatic owner who is excellent at what they do. Replacing such a lynchpin can be problematic for a potential buyer.
Understanding the company’s sales processes and operating procedures will clarify how easily a new owner can take the reins and maintain revenue. It will help you know how the company approaches sales and how they’ve been successful. Honest and thorough questions will help you see whether the company has room for growth.
Has growth been a lot of up and down, or steadily up and to the right? The answer to this question can help you learn what to expect once you take over.
Many businesses have a vision of a perfect customer. Who is that for the company you’re considering buying?
Customers are an essential part of any successful business, and a business owner should have no issue connecting you with some customers. Customers can often provide insight into how the company works, along with some strengths and a few things that could be better.
When buying a business, you’ll take over existing employees and suppliers. Understanding their history with the company, as well as strengths, weaknesses, and challenges, will help you make a fair assessment of whether they are something that would work for you.
Many businesses rely on vendors to produce outstanding products or provide excellent service. Some suppliers may be interchangeable, while others are hard to replace. Obtaining an overview of these relationships can help prevent surprises with your expenses and operations.
Supplier payment terms and contract conditions can significantly impact your working capital requirements. While the contracts may transfer to a new owner, some may need to be renegotiated. These negotiations can take time and energy and may impact the company’s profitability.
Employees play a valuable role in many businesses. When you purchase a company, its employees generally become your employees. These questions should get you access to the number of employees, their contract conditions, and their history with the company.
There are also questions to ask yourself before buying a business beyond if you are offering a fair price or how you’ll finance the transaction. Questions such as: Why this business now? Can I add value to the organization? Is my skill set robust enough to ensure my success? Is my significant other on board with the commitment?
Acquiring a business is a life-changing transaction that comes with significant obligations. Because it’s crucial to find out all you can about a company and the seller’s motivations, there are many questions to ask before buying a business. You can only decide if this is the right deal for you by answering these important questions.