Are you thinking about buying a company. If so, there are certain essential questions you need to ask before buying an existing business.
What you need is ways to ensure that the business you’re thinking of purchasing will be profitable, not loss-making. One way to do this is to ask both the current owner of the business and yourself a series of questions, questions which go to the heart of the matter but which are often neglected by first-time buyers of businesses. The answers to these questions will help you to pay the appropriate price for the business you have in mind, and likewise will help you to reduce the risk inherent in this kind of venture, by providing you with the understanding necessary for maintaining a steady flow of revenue, and for identifying potential obstacles and challenges to look out for in your first few months of ownership.
The chance to buy a business may appear unexpectedly, giving you the opportunity to expand your business, or to put a flailing business on the right footing in exchange for extravagant rewards. Yet chasing these rewards entails a lot of risk, which means that you need to think through both the real facts and the possible futures of your endeavor. Writing up a set of questions, and the answers to them, will help to focus your mind so that you can think more systematically about the course you are preparing to take.
Questions on the History of the Business
First, ask the present owner of the business factual questions concerning the way the business has performed in the past. Hopefully, the owner will inform you of any missteps and challenges he has faced during his time running the business, and provide you with valuable advice.
Why are you Selling?
The directness of this question can sometimes bring out important facts about the business, particularly with regard to difficulties it faces. Oftentimes though it is met with stock answers like “to spend more time with my family” or “to travel the world” that may not tell the whole story. If you feel that something is being held back, probe further; your wealth is at risk, after all.
How Long have you Operated the Business?
It’s a positive sign if the business has been in operation under a single owner for a long time: A well-established market generating a steady stream of revenue that you can direct into your own hands.
Why did you Buy the Business Originally?
The answer the owner gives to this question may reveal a judgement concerning the wisdom of the decision, disappointment or satisfaction with it. Having a conversation on this topic will also help you to understand your own reasons for making this major decision.
Questions on the Financial Basis of the Business
You’ll naturally want an understanding of the concrete facts of the business, and here are some examples of questions you can ask to gain it:
What is the Annual Gross Revenue Amount?
This will let you know how much money you can expect to take in each year as owner of the business. It’s important to combine the answer you get to this question with the answer you get to the following question:
How much Profit has the Business Made over the Years?
If gross revenue is high but profit is low, it’s an indication of high overhead costs, which is generally something to be avoided.
Questions on the Price to Purchase the Business
The final price you will pay for the business will be determined in the negotiation stage, but it’s important to get a general idea early on of what that figure might look like, so that you can know whether you want to proceed. Anything more than three times the business’s annual profit is too much.
How Did you Calculate the Selling Price?
This is another question that can give you a glimpse into the mentality of the owner.
What Assets are Included?
This includes both concrete, quantifiable assets, such as vehicles and equipment, as well as qualitative assets like customer loyalty and brand identification. Try to get as exhaustive an account as possible.
What Kinds of Liabilities Are There?
Due to laws that stipulate “successor liability”, when you buy the business you will likely take on any unresolved liabilities it has. Taking care on this point is crucial, so be sure that the owner has paid off the business’s liabilities before you conclude the purchase.
Has an Independent Auditor ever Appraised the Business?
As mentioned above, the best way to get answers to these questions is to hire an independent auditor, whose job is to give you a complete and accurate picture of the company’s finances.
Will the Auditor I Hire Have Sufficient Access to the Business’s Records?
It’s important for your auditor to review the company’s records over the past 3-5 years, including tax returns, balance sheets, income and cash flow statements, rentals and leases, etc. If you can’t get sufficient access, the owner may be concealing something, so cancel the purchase and find a better way to spend your money.
What do you Estimate the Goodwill Value of the Company is?
Beyond the concrete financial data, there are many qualitative factors of business success, which the current owner should know better than anyone. These may include brand identification, customer loyalty, and the experience and skills of the company’s employees, for example.
These are questions to ask in order to get a clear picture of how the process of financing your purchase will go.
Do you Want to Finance the Purchase yourself?
Oftentimes, the current owner of the business will finance between 10% and 25% of the sale. This question can give a window into the current owner’s knowledge of the state of the company: If the current owner is willing to agree to do this, it indicates optimism for the business’s future, and if not, you should take it as a sign that the company may not be in as great of shape as it appears at first glance.
Can you Recommend any Sources of Financing?
Given the owner’s experience, he may know of financing sources that you are not aware of.
How about a Standby Position?
Taking a standby position means that the seller of the business won’t receive any payments for two years or so. This is a common way to ensure that the transaction will be fully financed if the seller isn’t willing to finance the transaction in full.
Day-to-Day Management Questions
The better your understanding of the ways in which the business you’re looking purchase generates revenue on a day-to-day basis, the more confidence you’ll have when you take over ownership and start running the business yourself. Preparing a list of questions and writing down the answers you get can help you to take a more systematic approach.
What is the source of the company’s revenue?
It’s important to know how you will be receiving payments, whether one-time payments, subscriptions, or the like. This may be done in a variety of ways, some of which may be unfamiliar.
Is there a List of the Clients whose Business is Profitable to the Company?
If there is such a list, you should request to have a look. This information may be helpful in running the business, and may give you a good reason to purchase the business in the first place.
What’s the Company’s Marketing Approach?
Ask the current owner what marketing approaches have been used, what has worked and what hasn’t. This will help you to use your money more effectively right from the outset.
How many Hours do you Work per Week?
You’ll want to know how much time you’ll need to dedicate to running the company. No matter how dedicated you are, you’ll want to maintain at least some sort of work-life balance.
Do you Pay yourself a Salary?
If the company isn’t generating enough profit to pay its owner, it’s likely not worth purchasing.
What is the Turnaround Time for the Company to Receive Payment for its Services?
If the company doesn’t receive immediate payment for its services, there may be a problem in the supply-chain, which could affect your desire to purchase the company.
Would you be Willing to Stay on for the First Months after Selling the Business?
The previous owner’s practical knowledge and experience would be a major help for you doing your first year as owner, no matter how much homework you do before purchasing.
Who are the Company’s Competitors?
Knowledge of competitors can be a life-or-death matter for businesses, and the current owner will likely have a wealth of information about them.
Is the Business’s Success closely Connected to the Owner’s Personality?
If so, it may be difficult for the business to succeed under someone else’s leadership, no matter the work put into it.
Have I Discussed the Company with People other than the Current Owner, such as Customers, Suppliers, Personnel, etc.?
It’s important to verify the information communicated to you by the seller, in order to be confident that it’s accurate and complete.
Do you have any Advice for me to achieve the greatest Success for the Company?
Putting this question to the current owner of the business will help him to focus his mind upon what exactly he has done to make the business prosper in past years, and the answer may provide useful and practical understanding to you as the new owner.
What are the Necessary Licenses and Permits?
It’s important to remain in compliance with the law, so you will need to find out which licenses will carry over into your ownership and which will need to be renewed.
Are there any Outstanding Suits at Civil Law?
If so, you should definitely think twice about purchasing the company. Make sure all lawsuits are completely resolved.
Questions to Direct to Yourself
Most of the above are questions to ask of the current owner of the company, but there are also questions that you should ask yourself, such as:
What is my Motivation for Buying this Business?
Managing a business is extremely difficult. Asking yourself this question will help you to clarify to yourself the reasons you have for setting out on the project, so that you can be sure that the demands of running this business harmonize with your ambitions, goals, character, and personal life.
Will I Enjoy Running this Business over a long Period of Time?
It’s crucial to remember that owning a business necessitates a significant time and attention commitment that extends long beyond the first joy of receiving the keys.
Will my Spouse be willing to Endure the Difficulties of Owning the Business?
The major commitment of time and attention involved in owning a business will undoubtedly affect your romantic partner. And also relationship that the two of you have together. Be sure that both of you have an idea of the road ahead and fully understand the difficulties and rewards of the project.
Are my Skills Sufficient for Success in Running this Business?
Cast a critical eye on your skills and experience. If you are thinking of buying a restaurant, but you have never worked in a restaurant before, it’s probably a good idea to think twice before taking the plunge.
Is Buying the Business within my Financial Means?
Re-evaluate your financial situation, and be sure you won’t be spending more than you can afford. Remember also the costs that will come alongside the price of buying the business, such as inventory, rents, utilities, payroll, etc.
Consider your present revenue stream, and determine how much expense you will be able to bear. You need to pay attention especially for the initial down payment, usually between 10% and 20% of the final price. Once you’ve arrived at the maximum expense you can pay, don’t go above it.
Would it be Better to Start a New Business, rather than Buying an Existing One?
There are advantages and disadvantages both to buying an existing company, and starting afresh. Check to see if breaking new ground would help you achieve your goals more effectively.
Is this the Right Company to Buy, or is there Another that would be a Better Choice?
Try making a list of the positive and negative points for each possibility.
Do the Company’s Financial Documents Show that the Company is in a Healthy Financial State?
Look carefully over the company’s financial documents, preferably with the help of the financial expert like those here at NumberSquad. The company’s tax returns over the past 3-5 years, payroll documents, balance sheets, etc. will help you to determine the soundness and viability of the company going forward.
What is the Going Rate for Similar Companies?
You can get this information from local governmental offices, and there are also online tools that can help.
Instead of Financing, could I make an All-Cash Deal? Is an All-Cash Deal a good idea?
It’s rare for a company to be bought in a single cash transaction; if you have the means, you should still ask yourself twice whether it is the best option.
Do I have a Business Plan Ready to Present to Potential Investors?
Having a detailed business plan demonstrates your level of dedication to the project. It can be used to quickly show the likelihood of the project’s success.
Will Some or All of the Employees be Staying on?
Look over the company’s current personnel, and determine the contributions they make to the success of the business. Make an effort to convince the best employees to stay on, and meet with them to discuss the future of the business.
When the opportunity to buy a business arises, it’s important to consider all the relevant facts and possibilities. As we’ve seen, one way to go about this is to come up with a list of questions for the current owner of the business and for yourself.
What you’ve read is just an example of this; you should use it to think up your own list of questions. Remember that you are undertaking a major risk in the hopes of getting a major reward. So, be as thorough as you possibly can. Doing this will also help you to pay a fair price for the company. This also gives you a head-start in confronting the day-to-day challenges of managing the business after you’ve bought it.