Buying a business involves a lot of risks that need to be analyzed before moving forward in the deal. To properly assess all the aspects of a business purchase you should conduct commercial due diligence, but before entering deeper into the deal, it’s a good idea to prepare these 10 questions to ask when buying a business.
1. Why are you selling the business?
The first question that you need to ask the business owner is the reason behind the sale. This sole question can determine whether you should remain interested in the offer or not.
The following answers can be a good indicator that you should continue with the business acquisition:
The business owner wants to retire, has health or personal issues
They want to focus on other ventures or seek different business opportunities
They are unable to continue operating the business due to a relocation
They are no longer passionate about the business
On the contrary, the next answer would be a red flag, so you must continue carefully and gauge your options.
The business is performing poorly
The business owner is no longer capable of sustaining the company
They think the market opportunities are decreasing
Whatever the answer might be, you need to dig deeper and decide whether you will be able to keep the company afloat. Asking this question will also help you have a better understanding of the owner’s intentions and if it is wise to continue making negotiations with such a person.
It’s also crucial that you hear the company’s background story to have a deeper knowledge of its value and its areas of opportunity. The way the business owner talks about the company will help you see if they put effort into building it.
- What is the story of the business?
- For how long have you owned the business?
- What are the business’s strengths and weaknesses?
- What are the biggest challenges the business faces?
2. How many hours do you spend on the business per week?
It’s key to be aware of the amount of time and effort the current business owner puts into his business and ensure they align with your personal and professional goals.
This question will help you have a better idea of how you are going to invest your time and how rewarding the management of the business will be for you. Also, by asking this you could see if the company depends on its current owner or if you will be able to keep it growing.
What skills do you need to have as an owner to run this business?
- Are you currently paying yourself?
- How involved are you in managing the business?
- Is the company’s success tied to you as the business owner?
- Are there any other investors or owners?
3. What is the relationship with customers, employees, and other stakeholders?
Customers are the foundation of every company. The clients’ current opinion toward the business you are about to buy is decisive, for its reputation will determine its likelihood of growth.
You can get a fuller picture of the standing of the business by looking at its social media reviews, and online ratings, or even with the help of the Better Business Bureau.
Also, you need to have a deeper understanding of the quality of the customer base of the target business. An acceptable amount of loyal customers does not necessarily means profitability for you. Clients can sometimes be loyal to the business owner rather than the products or services it offers.
The term “stakeholders” does not only refer to the owners of an organization but to everyone who can impact your business. And that, of course, includes the workforce of the company.
It’s critical to look into the relationship of the business with its employees and the value they deliver to the company. Learn how many employees there are, who are the key employees, and consider if their knowledge and experience can be of great support after the acquisition.
Ask about the employment contracts and the day-to-day operations to be more clear on the employees’ rights and responsibilities, expertise, and working environment.
Gauge whether the employees will have the same commitment toward you once you purchase the business.
Digging deeper into this question will help you see if the employees are used to getting some kind of benefits for their work, or if their wages are higher than you had prospected. Also, the turnover rate will give you some hints about their level of satisfaction at work.
Another significant aspect of the company is suppliers. It’s key to know who produces the product and if the business is involved in a signed agreement with them.
Ask how many suppliers it has and if the business heavily relies on a single supplier. You should also ask the seller if they are willing to transfer the existing contracts.
Take this opportunity to have a better sense of inventory management. Ask the business seller about the inventory levels they maintain so you know what to expect regarding the cash flow of the company.
To have unbiased insight, don’t miss the opportunity to get as much information as possible from direct sources. Directly ask customers, employees, suppliers, or others about their experience with the company.
- Does the business have a list of profitable clients?
- Is the success of the business tied to personal loyalty rather than business loyalty?
- What is the relationship between the company and its customers?
- How many employees does the company have? What are their roles, salaries, and benefits?
- Who are the key employees?
- Does the business have a high turnover rate?
- How valuable is the management team?
- Who are your suppliers? How is your relationship with them?
4. What legal liabilities does the business face?
It’s crucial to be conscious of the legal obligations and liabilities this business purchase carries. When buying a business, research if the company has faced or is currently facing legal issues.
Just as an accountant will be a great support with financial questions, a business attorney can help you stay protected by reviewing the legal aspect of the target company.
Have a clear understanding of the contracts the business has entered into and how they can affect your business operations. Ask whether the company has contracts with suppliers, employees, landlords, or others.
You should also be completely aware of the liability you will inherit as a business owner in the form of lawsuits. Ask if the company has any pending litigation and analyze how this will affect you.
Another important aspect is the use of licenses. Ask whether the business needs specific licenses, permits, or certifications and if they need to be renewed. A business lawyer can also advise you on how to handle intellectual property matters.
- Has the business been involved or is currently involved in any lawsuits?
- Is the company part of current contracts with other businesses or employees?
- Do you need any permits or licenses to run the business? Are they up-to-date?
- Does the business have lease agreements?
- What state and federal regulations affect the business?
5. Can you provide financial statements and tax returns?
Having a complete picture of the financial health of the business is vital to making an informed decision. Doing proper research on this information and handling it correctly will determine the risk of your investment.
Learning about the cash flow, profits, losses, revenues, and other financial information will help you have a clearer idea of the growing capacity of the business and if will be profitable for you in the long term.
Also, it’s very important that you have knowledge of any outstanding debt, because this can severely affect the future of your business.
An accountant can help you have a better appreciation of the target company’s financial situation and give you the information you need to know before continuing with the business purchase.
- What are the profit and loss statements?
- What do the balance sheets show?
- What is the Annual Gross Revenue?
- How much profit does the business make a year?
- What are the company’s tax returns from the last three years?
- Does the business have any outstanding debt?
- Does the company have a good relationship with its bank?
6. What are the day-to-day operations of the company?
Before entering a business, you need to understand the daily activities that make possible the operation of the company. This way, you will know what the business will require from you, along with its customers and clients.
Going deeper into this question will give you a clearer picture of the skills and experience you will need as a new owner. You will learn the tasks that must be completed regularly and the problems you may encounter.
It’s key that you ensure the standard operating procedures (SOPs) are well documented since they will provide you with the guidance you need to immediately start running the business without difficulties. You can also use this opportunity to ask the seller if there is any advice on how to run the business.
- How does the business generate revenue?
- What are the products or services of the business?
- How does the business produce products?
- How well documented are procedures? (SOPs)
- What software or special knowledge does the business require?
7. What is the long-term growth potential of the company?
Understanding the market environment of the business is what will help you decide if it will continue to be profitable in the long term. You can ask the seller what is the UVP (unique value proposition) of the business, which is what makes the business distinguishable from others.
Having a clear idea of your target customer will help you judge if it’s feasible to reach them. Ask convenient questions to analyze if the market is stable, growing, or shrinking.
You will also have to learn who are your competitors, how they operate, and the position of the business against them. It is also a great idea to have a general insight into the marketing plan to know what strategies they have used, what worked, and what didn’t.
- What’s your marketing plan?
- What is the target market of the business?
- What are the threats and opportunities the company faces?
- Who are the business’s competitors?
- What is the future of this industry?
- What market share does your business have in the Industry?
8. What is the price you ask for the business?
Ask the buyer how much is asked for the business. One way of having an approximate fair price is that it should not exceed the amount of three times the annual profits.
Learn what parameters the seller used to calculate this price. It’s also a good idea to ask if the business has been valued before by a third party. Ask if the price is negotiable and if there are ways of financing the business.
- Did you ever have an independent auditor make a business valuation of the company you sell?
- What method or considerations did you use to calculate the price of the business?
- Is the price negotiable?
- How was the price for the business calculated?
- How would you accept the sale to be financed? Is seller financing available?
9. How do you want to handle the business transition?
Whether the transfer of the business will be carried out smoothly is a factor that seriously affects your investment. It is paramount that the business transaction occurs seamlessly and in the shortest amount of time.
You need to ask how long it will take for the business owner to hand over the company and how involved will he continue to be during the process.
Learn how the seller plan to announce the business sale to ensure a good communication with your new workforce or partners. Ask if the business seller is willing to help you by introducing you to the employees and suppliers, providing training, notifying banks, and other concerns that need to be addressed. You can also the seller if they are willing to stay or offer support for a specific period to help you learn the basics of the business.
- What is the handover period?
- Are you willing to help during the transition? Can you stay on for a transition period?
- Are employees and stakeholders aware of the transaction?
10. What assets are included in the sale?
Another pertinent question is to ask what is going to be included in the sale. Make sure you are aware of what assets actually belong to the business seller and what you are about to buy.
Make an inspection of each asset and gauge whether you need them or not. You may already have some equipment you could use or find a way to dispense with some parts of the offer and minimize your expenses.
- Are the facilities, equipment, fixtures, and vehicles in good working condition?
- Does the business have intellectual property, trademarks, or patents on its products?
- Will the ownership rights of any intellectual property be transferred?
Buying a business is a very risky investment, for you need to gather the most information to know its profitability and liabilities.
This guide provides just a basic list of questions that can help you have a better insight into the target business and see if you should disqualify the offer or continue with it.
You can get the complete due diligence checklist here for a small business acquisition.
However, in order to ensure you will protect your investment, you should continue the transaction process with an M&A attorney and an accountant. The correct team of experts will make sure you follow the proper commercial due diligence process and that you face the least risks with this new business venture.
Fill out the form below to get in touch with a business acquisition attorney who will follow along with you throughout the whole M&A process and make sure you don’t make any mistakes.