Wouldn’t it be great to boost the chances that a business you end up purchasing will be a lucrative cash cow instead of a money pit?
I just asked you a question.
If you want the business you’re thinking about buying to be successful, there are many questions to ask when buying a business—a lot of them. Too often, budding business owners buy a business without making the essential inquiries that provide him with the working knowledge he needs to be successful.
One of the best reasons for asking the right questions is by doing that, you’ll pay exactly the right price for your new business venture and not a penny more. Asking great questions also helps minimize your risks. That’s because you’ll find out exactly how you should run your business to make sure you always have a steady revenue stream.
You want to be asking the kinds of things that’ll uncover all the red flags and other potential minefields that could cause your business to blow up in your face six months down the road.
As an entrepreneur, an opportunity to buy a business might just rear its pretty little head.
This can give you the chance to build up an existing business or to turn around the financial misfortunes of a company that might be struggling. And if you do it right, you’ll be rewarded handsomely for your efforts.
There’s a lot at stake here. So, sit down and come up with an exhaustive list of questions to ask that’ll elicit the exact information you need. Equally important, write down the answers you receive so you have this knowledge when you most need it.
Questions About the History of the Business
You’ll want to know at least a little about the history of the business you’ll be plunking down your hard-earned money for. If the owner is honest, you’ll learn about the mistakes the owner made in the past. And, hopefully, he’ll give you valuable pointers on how you can avoid them.
That’s why asking the following questions is so crucial!
1. Why are You Selling?
This might alert you to recent problems the owner has had with his business. The beauty of this question is that it’s blunt, right-to-the-point, and gets right to the meat of what you need to know. However, sometimes you’ll get a pat answer like “I want to retire” or “It’s time to see the world.” Although answers like these from business owners can be truthful, frequently, they’re not.
That’s why it’s up to you to dig a little deeper to see if you can uncover the genuine reason. Sometimes, in situations like this, you’ll just have to trust your intuition.
2. How Long Have You Had the Business For?
If the current owner has had it a long time, that might mean you’ll probably have it a long time too. Past longevity is an excellent indicator of continued success. So, if the proprietor has been in business for three decades, you’re probably inheriting a valuable asset that’ll continue to be a cash cow for you too.
3. Why Did You Originally Buy It?
This question can give you a glimpse into the mindset of the current owner. It also might help you get really clear about your own motivations. Which is a good thing to do when you’re taking on a project that’ll eat up a lot of your time.
Questions to Give You Basic Financial Information
You’re going to want hard financial data, right? So here are some questions to ask to get them:
4. What’s the Annual Gross Revenue?
This will tell you how much money you’ll be able to pull in with the existing business. But probably even more important is the next question…
5. How Much Profit Have You Made Over the Years?
Look closely at these figures. If gross revenues are significant, but there’s not much of a profit margin, this is indicative of high overhead. Which is definitely a red flag.
Once you start seriously considering buying a business, you’ll want to get these financials verified by an independent auditor. This individual will scour the books with a proverbial fine-tooth comb to confirm that what the owner told you is the truth.
And if he does his job right, he’ll leave no stone unturned.
Questions About Selling Price
Ask questions that’ll help you get to a more precise determination as to how much the small business is worth. This information will help you pay a reasonable price for the company, so you’re not swindled. If you overpay, this could leave you in dire financial straits, which could ultimately lead to the failure of your business.
Questions to ask about price include:
6. How Much Are You Asking?
Try to get at least a ballpark figure for how much the owner wants. This will let you know if proceeding to the negotiation stage will be worth it. The price should be no more than what three times the annual profits are.
7. How Did You Arrive at the Purchase Price?
Again, this is the kind of question that’ll give you a little peek into the mind of the owner. Listen carefully, and then decide whether you think his answers are trustworthy.
8. What Assets Am I Getting?
This includes both tangible (things like delivery trucks, cooking equipment) and intangible (goodwill generated, social media accounts) assets of the existing business. You want a comprehensive inventory of every single thing you’ll be getting in the sale.
9. Will I Be Taking On Any Liabilities?
When you are buying a business, you could also be picking up undisclosed debt. This could significantly jack up what you’ll pay. That’s why it’s so important to ask this question!
Any liabilities you’re not assuming need to be paid off before closing. Don’t let the owner say he’ll take care of them later. That’s because the legal doctrine of “successor liability” means that you’ll most likely have to pay them off yourself.
10. Have You Ever Had The Business Appraised by an Independent Auditor?
An independent appraisal will give you the best idea of how much you should pay. So, if one hasn’t been done, you should think about having one done before you buy it. This way, you’ll know the value of the business you’re thinking about acquiring.
11. How Much Access Will My Auditor Have to Your Books?
You’ll want to make sure that you or your financial professional can look at the business’s financial statements for the last three to five years. These include tax returns, income statements, balance sheets, cash flow statements, and any current contracts or leases. If you’re going to have an independent auditor look at them, make sure you hire a reputable one.
While it would be nice to trust a business’s own financial analysis, it’s best to be sure the statements have been vetted by accounting professionals. If the owner refuses, he may have something to hide. In that case, it would be best to just walk away from the deal.
12. What Do You Think the Goodwill Value Of Your Business Is?
There might be a lot of intangible things that go into the owner’s personal valuation of his existing business than the hard-financial data would reveal. These include things like the reputation of the company, customer lists, and employee expertise.
Questions About Financing
The following questions will help clarify your financing options:
13. Are You Willing To Finance the Transaction Yourself?
This will indicate whether he believes in you and the small business. Seller financing usually covers 10% to 25% of the purchase price of a company. It can be used to add to a down payment.
If you can get your seller to put some money on the line by financing the sale, it might serve as an indication of the seller’s confidence in the future of the small business. They know more about the business than you do, and if they’re not willing to gamble on its success, why should you?
14. What Financing Options Do You Recommend?
He might know sources that you don’t know about. It doesn’t hurt to ask!
15. Are You Willing To Take A Standby Position?
Most small business loan lenders loans insist that sellers take a standby position for about two years. This means the seller won’t receive any payments during that time. If your seller won’t finance the entire transaction, find out if he’d be willing to take a standby position so that the rest of the deal can be funded.
Questions About Day-to-Day Management
Devise a series of carefully written questions to ask that’ll help you figure out how the small business generates revenue and how it’s run on a daily basis. The more you understand all this, the more confidently you can operate your new business. Businesses with a steady revenue stream are the safest bet.
Ask questions like:
16. How Does the Business Generate Revenue?
You’ll want to know how you’ll get paid—whether that’s a one-time payment, through a subscription, or some other means. Some businesses have unique ways of generating revenue that might not be familiar to you.
17. Does the Business Have A List Of Profitable Clients?
If the small business you’re thinking about acquiring has one, ask to take a look at it. This list could be a goldmine for you, and one more reason to buy the small business.
18. What’s Your Marketing Plan?
Ask the owner what kind of marketing he’s done in the past. And, what worked and what didn’t. This way, you’ll get valuable feedback on the marketing that’ll get the most bang for your buck.
19. Just How Many Hours Do You Work Each Week?
This is an indication of how much of your time your business will eat up. Even the most die-hard entrepreneurs will want to get away once in a while. So, find out how often the current owner was able to get away. You want to know what you’re getting yourself into!
20. Are You Currently Paying Yourself?
If the owner isn’t getting paid, this is a red flag. You want your venture to generate enough profits that you can draw a salary.
21. How Quickly Does the Business Get Paid for Services and Goods?
If there’s a time delay between the delivery of merchandise and payment, there might be a supply chain problem. You might want to take a closer look at that before you agree to buy the business.
22. Can You Stay On For A Short Time To Ensure A Smooth Transition?
Buying an existing small business isn’t like making other large purchases. No matter how much you know about what you’ll be selling, there’s probably going to be at least a bit of a learning curve. That’s why it would be great if the owner could stay on for 6-12 months to help you learn the ropes.
23. Who Are Your Competitors?
Many businesses fail because they don’t meticulously study their competition. You need to know your competitors inside and out so you can effectively compete against them after buying a business.
24. How Much Of The Success of the Business is Due to the Owner’s Personality?
If the answer is “a lot,” you might think twice about buying this business. That’s because this is something that’ll be hard to replicate, even with hard work.
25. Have I Talked Directly to Customers, Employees, Suppliers, and Others to Independently Verify the Information I’ve Only Learned From the Seller?
You need to get your information from secondary sources—not just the owner. This way, you can make sure it’s as accurate and truthful as possible.
26. Do You Have Any Tips for Me On How to Make the Business as Successful as Possible?
This question will help the owner formulate in his mind precisely what’s he’s done over the years to make his business successful. This might result in valuable information you can replicate so that you’re successful too.
27. What Licenses or Permits Do I Need to Get?
You’ll want to make sure you comply with the law. Also, find out how many of these licenses will transfer over to you.
28. Are There Any Pending Lawsuits?
If legal matters are hanging over the business’s head, this is definitely a red flag. Issues like that can quickly drain you of your financial resources.
Questions to Ask Yourself
Also, put yourself in the hot seat and ask yourself some probing questions, like:
29. Why Do I Want To Buy This Business?
This uncovers any hidden motivations you haven’t previously considered. Running a business is damn hard, so you want to make sure you’re doing it for the right reasons. The answer could be that you see it as an excellent investment, you absolutely adore the industry, or it’s a favorite business you’ve frequented over the years.
Just make sure you have a compelling reason for buying a business. You’re going to be spending lots of time at the place, making sure everything runs right. So, it’s got to be a reason that makes all that effort worth it in the end.
Also, really think about what you’ll have to deal with on a daily business. For example, if you’re buying a restaurant, do you have the patience to deal with disgruntled diners?
30. Is This The Kind of Business That’ll Bore Me To Tears A Few Months In?
Doing it just because you’re bored isn’t a good reason. Get a hobby instead. Running a business can be tedious, and it definitely is hard work.
31. Is My Significant Other Going to Be Supportive?
For better or for worse, being an entrepreneur is going to affect your relationship with your spouse. She (or he) will be going along for the ride, whether she wants to or not. Have a frank discussion with her to make sure she’ll be able to put up with you working long days.
32. Do I Think I Have The Skills To Ensure my Success?
Take a good look at your professional repertoire and make sure you have the skills you need to make the business you’re thinking about buying a resounding success. For example, if you’re buying a restaurant, it might be a darn good idea to have some experience actually working in one beforehand.
33. Can I Really Afford To Purchase It?
Don’t overextend yourself, or you’ll suffer problems down the line. Besides money to purchase the business, you’ll need working capital to cover payroll, rent, utilities, inventory, and many other things.
Analyze your current cash flow and figure out how much money you’ll be able to spend on the business. Make sure you have enough money for the down payment, it’s usually 10 to 20% of the purchase price.
Then, come up with a price tag and stick to it.
34. Instead Of Buying A Business, Would It Just Be Better To Start From Scratch?
Maybe it might just be better to start from the ground up. That way, you get to lay out your own vision instead of building off the dreams of another.
35. Why Should I Buy This Business And Not Another?
If you have more than one possibility in mind, list the pros and cons of each. This will help to clarify your decision.
36. What Kind Of Financial Picture Do the Financial Documents Paint?
Take a look at all the financial documents with your certified financial professional. These are things like the tax returns for three years, balance sheets, and the cash flow statements. Then, decide whether the business is fiscally healthy enough to make purchasing it a sound idea.
37. How Much Have Similar Businesses Recently Sold For?
To do this, visit local county offices to see which commercial properties recently had a change in ownership. There are also online resources that will help you to do this.
38. Do I Really Need Financing, or Can I Find Creative Ways to Do an All-Cash Deal?
There might be some circumstances under which an all-cash deal makes sense. However, consider the following question…
39. Is An All-Cash Deal Even a Good Idea?
Few buyers can afford an all-cash deal. Even if you could, incurring that level of risk might not be for the best.
40. Have I Come Up With A Business Plan I Can Show To Potential Lenders?
A business plan shows that you’re serious about your business. It’ll also reveal how feasible it is. These are two things potential lenders are going to want to know.
41. Will You Be Keeping All the Employees?
Try to figure out which ones will be indispensable assets to the business and try to sweet talk them into staying. It’s also a good idea to meet with the employees once it looks like the sale’s going to happen. Then, answer any of their questions regarding your future plans for the business.
If you’ve had a lifelong dream of buying a business, you’ll need to do your homework. And, the best way of doing your homework is by asking—both the owner and yourself—some really penetrating, hard-hitting questions.
Don’t let either the owner or yourself off the hook. You’re buying a business that’s going to be both a significant investment of time and money. Asking the right questions will help you to get a business for a fair price, prepare you for the difficulties of ownership, and ensure your long-term success.
So, sit down before you buy and make up your list. You don’t have to limit yourself to the questions posed in the article. Use them to spark your own!
Which of these questions did you find to be most beneficial for getting the information you need to make up your mind? Let us know in the comments!