The transition from the seller to the buyer is an extensive process. It is important to be thorough before and during closing to ensure you have everything you need to take over daily operations. There are a range of questions that you should ask the business owner before you buy it. In this review, we discuss these questions in greater detail. Keep in mind, every purchase is unique. The questions should depend upon your specific situation. Consequently, it is best to work with a business broker during the purchase process.
What Permits, Licenses, and Insurance Coverages are Required to Operate?
Firstly, you should establish what permits and licenses the company needs to operate within the industry and location(s) in which they are based. Additionally, you should find out what permits, licenses, and policies are transferable and which ones you want transferred. For instance, if you are purchasing a company that allows for the consumption of alcohol and/or distributes alcohol to patrons, then you should ensure the company has a transferrable liquor license.
As it pertains to insurance, the seller should ideally already have all that is necessary to operate and the insurance should be affordable. If not, then it may be best to seek another policy, in which case the existing insurance policies must be canceled. To use the same example as above, if the company has a liquor liability insurance policy that is separate from their general liability policy, then it may be beneficial to combine coverages under the same provider.
What Assets Come With The Business?
It is important to clarify the assets that are included in the sale so that both parties are on the same page. Of course, this information should be detailed in the purchase agreement (and asset agreement). However, a discussion of it with the business owner can help ensure everything is agreed upon as it pertains to the inclusions and exclusions of the sale. Specifically, assets that are usually exchanged during a business sale include:
- Equipment, such as machinery used for daily operations, office equipment, etc.
- Technology, such as computers, security camera systems, etc.
- Real estate property, such as office buildings, warehouses, etc.
- Intangible assets, such as trademarks, patents, computer software, etc.
How is The Workplace Culture? Is There a High Employee Turnover Rate?
One of the biggest fears of buyers is that the employees will not work well with them once there is a change in ownership. This could lead to failing business operations and subsequently a decline in their service, which can lead to the loss of customers.
A great way to prepare is to find out more about the workplace culture. A good work environment with experienced employees who enjoy their work can allow for a more seamless transition when you take over the business. More specifically, ask the seller the following questions:
- What is the current employee morale?
- How long has each employee been with the company?
- What employees, if any, can take over the daily operations of the seller (previous owner)?
- What roles currently need to be filled?
- Have there been any employee complaints or lawsuits in recent years?
This will help you set your highest priorities when starting the company. For instance, if there is a high employee turnover rate due to poor workplace culture, then you can take steps to improve morale such as adding a bonus structure or hosting a corporate retreat.
Have You Spoken With The Top Customers?
It is also essential for buyers to ensure the company’s top accounts remain after the change in ownership. If they feel as if they are being blindsided and were not properly informed of the ownership change, they may switch to one of your competitors. To avoid this from occurring, you should ensure that the top customers are notified and willing to stay on board after the sale is complete. If they do not continue purchasing from you, then you may be able to facilitate a more fair and favorable sale price.
How Involved Are You Willing to Be With The Business Transition?
This question should come relatively early in the process. In fact, this is an important topic to cover during negotiations and due diligence. Specifically, you want to establish the role of the seller after closing. For instance, they may remain on staff for up to six months at their current salary to ensure a smooth process. In other cases, they may only offer an advisory role. To help learn more specifics about their involvement after the sale, consider asking these questions:
- Are you willing to remain in a full-time role for some time after the sale is complete?
- How much do you currently pay yourself? Are you willing to remain full-time for this amount?
- Are you willing to provide consulting services via phone call and email?
- If you are not involved post-sale, what employees are best equipped to take over your daily role within the company?
- Do you foresee a challenging transition for the new ownership? If so, how can we alleviate the challenges?
Do You Have a Future Strategy Plan and Financial Forecast?
The seller is often the one with the most knowledge about growth strategies. This is because they understand market trends and what the company could have focused on more to drive more company growth. In some cases, the previous owner may have plans in place for substantial growth but have simply never gotten around to implementing their growth strategies. Be sure to utilize the previous owner to your full advantage and find out what you may be able to do to improve the operations and profitability of the company you are purchasing.
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