One of the easiest and smartest ways to break into the market of your dreams is to buy an established business rather than start a new one from scratch. However, this decision could also be your worst nightmare if you don’t get it right. This is because there are too many pitfalls that you can only avoid by being very careful.
Now, get this clearly: buying a business is not like buying a car or real estate. A car or real estate property is no more than a commodity. But a business is a bundle of entities—inventory and fixtures, location and market penetration, experienced management and qualified employees, accounts payable and vendors, customer lists and account receivable, and many other components.
So, you can now see what a business entails and why you should be careful when buying one, right? One of the smartest ways to avoid buying the wrong business is to get as much vital information about it as possible. How? You can achieve this by asking important questions about the business from the owner or seller. Asking key questions about a business can help you make a well-informed buying decision. Here are 10 such questions:
10 Key Questions to Ask When Buying a Business
1. Why are you selling the business?
Many potential buyers are shy to ask this question because they think it’s abrupt or inappropriate. But it’s not, as long as you ask it at the right time. Regardless of the answer, retirement, bankruptcy, whatever, the information will contribute to your decision about whether to buy the business.
The best reason is that the owner wants to retire and has no children who are interested in running the business. And this answer is quite acceptable provided the seller appears to be of the retirement age. However, you should raise your red flag if a relatively young seller says he just wants to “do something else”.
2. What are your biggest challenges upfront?
This smart question can help you reveal the real reasons why the seller wants to sell the business if he’d been telling you something else. If a seller tells you he’s selling the business just because he’s no longer interested in it, ask this question. If you get answers like “the company needs about $500,000 in capital improvements” or “the competition is becoming stiffer by the day“, then you just got the real reasons why the business is being sold.
3. How did you arrive at your asking price?
Many sellers will base their asking price on arbitrary factors such as how much they will need to move on with their life or how much they lost when they just started out. So, to avoid paying more than the real worth of a business, you need to ask this question. If you find out that the seller arbitrarily arrived at his asking price, there’s likely more room for negotiation.
4. Is the business employee-driven?
This question will help you understand how much of the owner’s active participation is required by the business. Some owners are so integral to the success of the business that the business will start to fail one they leave, no matter how experienced the successor might be. You don’t want to buy such a business.
Don’t forget that some business owners can be actively involved in their businesses for reasons such as lack of trust, poor employees, or other issues you can still work out solutions to. But once they tell you, they are always involved because they think “they are the business itself” or they believe the business can’t thrive without them, then you need to just look elsewhere.
5. Who are your biggest competitors?
You need to know who the company’s competitors are so you can see if there is enough opportunity to improve the business by creating a competitive advantage. In addition, the answer will tell whether the seller really understands who his competitors are. In today’s marketplace, competition is not just the company within the same location offering the same products or services; it comes in many forms and from many locations.
6. How can I increase sales and profits?
If the seller knew the answer to this question, he would just do it. But sometimes, the answer isn’t about knowing. It’s about having the resources and capital to take advantage of an opportunity: Hire an extra salesperson, add a new branch, increase advertising across certain channels, add new product lines, and so on.
Sometimes, a seller doesn’t have the resources required for these. If you can include the capital required to take advantage of these opportunities in your acquisition plan, then that would be great.
7. Will you finance part of the purchase price?
According to research, more than 75 percent of small business sold in the united states involves some seller financing. Even if you don’t need it, ask for it and use it if it’s offered. A seller’s willingness to finance part of the purchase price shows he’s confident of the viability of the business.
8. Can I see your financial statements for the past three years?
This question is necessary because buying a business means buying an income stream. And you need these numbers to see how much of an income stream the business has been over the years. If the seller won’t let you see the financials, it’s either he doesn’t have any, or he’s trying to hide something, or he doubts your credibility as a potential buyer.
9. If you can’t sell, what will you do instead?
Knowing what the owner’s plans are if he can’t sell the business is important. First, this can help you determine your bargaining power. For example, if the owner would give the business to an employee, chances are they are reluctant to see it close down due to its huge worth.
Secondly, this question can help you figure out any hidden reasons—if there are any—why the owner wants to sell the business. If the owner would close down the business if he couldn’t sell it, chances are the business is in some distress.
10. Will you stay with the business for a while?
In most cases, you want the owner to agree to work with you for a while, especially if you have little or no experience in the business. The duration for which the owner would stay could range from a couple of weeks to several months, depending on learning curve requirements and your experience.
Ask this question even if you are not planning to engage the seller. You should feel uncomfortable if he won’t agree to spend any time with you.