When buying a business, it’s essential to ask the right questions. Questions ensure that you make an informed decision – and that you don’t end up with any unwelcome surprises down the road. If the seller isn’t providing the information you need, don’t hesitate to ask for it. In these cases, it’s up to you to dig deeper and get creative. In this blog post, we’ll look at the essential questions to ask when buying a business.
Buying An Existing Business
When you’re walking into a new business venture, there are a lot of questions to ask.
What kind of business is it? What are the financials like? How much work is required to get it up and running? What are the liabilities? And those are just a few of the questions you need to ask.
The good news is that most businesses will be happy to answer your questions – after all, they want you to be confident in your purchase. But sometimes, you must ask tough questions even if the answers make you uncomfortable.
Asking the difficult questions can give you the confidence you need to become the new owner -to take the reins from the current owner.
Ways to Buy an Existing Business
Consider starting your journey online at bizbuysell to get an idea of what is out there. Once you know what type of business you’re looking for, talk with business attorneys, community business leaders, and your network of contacts to find more leads.
Another way to buy a business is a bit like buying a house. Bringing on a business broker can help you find the type of business purchase you need.
Business brokers generally receive their commission from the business seller, so you can look at businesses you might be interested in with them without paying them during the business acquisition process.
Buying a business as an existing franchise is also possible, whether you’re looking at an online business or a brick-and-mortar establishment. Many small business owners choose a franchise purchase since it offers recognized branding, products, and marketing.
However, if you’re an experienced business person, you may not appreciate the restrictions placed on you as a franchisee.
Questions for the Current Business Owner
Business History
It’s also important to ask about the business’s history.
- How long has it been around?
- How long has it been in possession of the owner?
Knowing this information can help determine if the business is a good investment.
Business Operations
Ask about the day-to-day operations of the business.
- What are the legal obligations of the previous owner?
- How much work will you need to do to get it up and running?
These questions can help you gauge how much work is involved in taking over the business.
Could you Show Me Your Cash Flow Statements?
When buying a business, it’s essential to ask financial questions and look at the company’s finances and financial records. Financial statements can help you understand how healthy the company is.
You may want to ask for copies of the most recent:
- Balance sheets
- Income statements
- Cash flow statements
- Business activity statements
- Tax returns for the past 5 years for Federal and State
An experienced business attorney or financial professional can help you understand what all of this information means. But you’ll especially want to study the last income tax return to get a better idea of how much profit the company made in the past year.
Also, ask the business owner about how much working capital they possess. This measurement shows “the difference between a company’s current assets—such as cash, accounts receivable/customers’ unpaid bills, and inventories of raw materials and finished goods—and its current liabilities, such as accounts payable and debts. It’s a commonly used measurement to gauge the short-term health of an organization.” (1)
What is Your Current Business Plan?
Often, business success comes from a clear vision. So, asking the seller about their current business plan is crucial. Do they have a strategy for growth?
Find out what type of shape the business is in and if it has growth potential.
Asking about plans can also give you insight into whether or not the seller is passionate about the business. If they don’t have a clear goal or vision, it may be a sign that they’re ready to move on because they are retiring OR because of problems they don’t want to share with you! That’s why you keep digging!
Who are the Key Employees?
If the business you’re interested in purchasing has existing employees, you’ll want to ask the current owner about them.
- With all the employees counted, how many employees does the company have? What are their roles?
- Who is your management team made up of?
- What is the level of employee expertise on your management team?
Marketing and Company Culture
Many job seekers look at the company’s culture and the happiness level of employees before taking a job. In addition, current employees may let company culture influence their marketing strategies for the future.
- What is the company’s marketing strategy?
- Is the business involved in contributing to charitable organizations? If so, which ones?
- How is the company’s brand recognition?
- Do you have social media accounts? If so, what are they?
- What is the company’s intellectual property (IP)? What does it consist of (marketing blogs, posts? etc..)? Where do you keep it? Is it all part of this business sale?
Who is Your Target Market? Who are Your Existing Clients?
It’s essential to know about the company’s existing contracts and whether or not they’re profitable. You’ll especially want to know about contracts with clients and supply vendors.
Ask the seller questions such as:
- Who are your company’s current clients?
- What are your company’s current contracts?
- Who are your incredibly profitable clients?
- Do you have multiple suppliers?
- Who are your most common suppliers? Why do you work with them?
What is Your Market Share?
To understand the company’s success, you’ll want to know about its market share. Market share is the percentage of an industry or market’s total sales that a particular company generates.
You can use this information to see how much of the market the company currently has and if there’s room for growth.
What is the Total Value of the Business?
This is probably the most crucial question on this list. You’ll want to know the answer before you make an offer on the business.
There are several ways to value a business, but the multiples method is the most common.
Under the multiples method, you consider a business’s earnings before interest, tax, depreciation, and amortization (EBITDA). You then multiply that by a multiple corresponding to the business’s particular industry.
The multiples method is primarily suitable for companies that have in existence for some time. Here, a multi-year profit trend is the basis for valuation. The better the empirical values, the more meaningful the result will be. (3)
Creating a rough estimate of the business’s value is important for both the buyer and the seller. The buyer can use this information to make an offer, and the seller can use it to get an idea of what their business is worth.
Don’t consider the business appraised until you look at similar businesses recently sold. This will give you an idea of what a fair price is for the type of business you’re considering.
Talk with your acquisitions and mergers business attorney if you struggle to evaluate the company and need help deciding whether this is the best business venture for you.
Negotiating Price
When buying a business, getting an idea of the sales price is crucial. You don’t want to pay more than the business is worth, and you also don’t want to lowball the seller.
The asking price is usually not the same as the actual sales price, so it’s essential to research before making an offer. In some cases, the seller may be open to negotiating, but in others, they may be less flexible.
If you need help, bring on a business acquisitions attorney to help you negotiate the best purchase price from the existing owner.
Other Questions to Ask
- What is your company’s reputation in the industry and greater community?
- Can you prove that others respect your word?
- Do you have any pending lawsuits?
- Is there any situation that may develop into a lawsuit?
- Are there liens on any company assets?
- Check for Uniform Commercial Code Federal liens. Also, check for state tax liens on real property in the county’s Register of Deeds office.
- Check for human rights complaints or bankruptcy filings
- Contact the municipalities for business licensing and proper property use
- Check on NC Secretary of State to ensure that the seller owns buildings, land, and vehicles.
Due Diligence: Find Answers to Unanswered Questions
During the diligence process, you’ll want answers to any unanswered questions. Dig in and do your own research to find out more about the company’s financial health.
Finding as many answers as possible can make all the difference in whether a newly acquired business stays solid when you become the business owner.
Ask yourself and others:
- Does this company have other outstanding debt not mentioned?
- Do their financial documents prove their solidity as a business?
- What do industry organizations have to say about this company?
- Does the company meet or beat industry average profits for its size?
- Is this company growing?
- Is their marketing on-trend?
Our Experienced Business Attorneys Can Help
Talk with our knowledgeable business attorneys at Hopler, Wilms, and Hanna to find help when buying a new business. We can help you secure capital, find seller financing options, prepare for employee issues, evaluate a company, and more.
Schedule a consultation with us today to get started today!