There is no such thing as a dumb question, and that’s especially true when buying a business. Before you make the life-changing decision to purchase a business, it is important to learn as much as you can, both about that particular business and the industry as a whole. While there are some obvious questions to ask, like the financial situation and potential for growth, other questions may be less obvious, but their answers may provide insight to the future of the business as well. Consider these 6 questions buyers should always ask when purchasing a business.
This question gives insight into the current owner’s motivations. While there are certainly valid reasons for selling a business, like retirement or a health issue, you may also learn more about the challenges of the business, whether financial, mental, or physical. Owners should be clear and concise in their answers. If not, however, this could indicate a potential issue. Perhaps he or she is not being forthcoming in the answer. If so, be sure to dig a little deeper with the following questions to learn more about the current state of the business. In some cases, the owner may be hesitant because they aren’t yet ready to part with the business. While that is understandable-they’ve invested their time and energy into it for years-a hesitant seller could get cold feet and back out before the business is sold.
This is an essential question for two reasons. First, this should inform you, as the buyer, of the skills needed to run the business. It’s important to know that the owner of the landscape company you are considering spends a fair amount of time at the nursery, choosing the perfect plants for a customer’s yard. Or perhaps you plan to purchase an IT firm, but soon realize you may not have the technical knowledge to manage the day-to-day responsibilities. It is best to learn these, as well as any licensing or certificate needs, before ownership falls into your hands.
In addition, you may learn that the owner of the business is an integral part of the success of the business, which may raise concerns for the future. For instance, the owner may say that he or she is responsible for maintaining relationships with the company’s largest customers. If this is the case, will the customers stay with the business once ownership has changed? You may also learn more about the structure of the business. If everyone in a mid to large size business reports directly to the owner, this could be a sign of mismanagement within the company.
Most owners expect to provide prospective buyers with three years of profit and loss statements, along with tax returns and balance sheets. While you certainly want to analyze these thoroughly, you may also want to pay close attention to how these financials are presented. For example, an owner that gives you access to clear, organized financial records is likely an owner running a well-managed business. On the other hand, if financial documents are handed over in a shoe box, there may be cause for concern. Either way, be sure that these records are accurate and up-to-date, that personal expenses have been removed from the business, and that the business is currently in good financial standing.
First, it is best to research future growth of the industry you are looking to buy into before you pursue a specific business. If growth in the industry exists, then ask the current owner where he or she sees potential growth for the future. This can be a valuable insight moving forward. For instance, you may learn that the owner tried to expand to another area in the region with very little luck, but sees a possible opportunity for growth in another particular area. You may learn that a new product the owner plans to offer could boost sales significantly as well. In addition, be sure to core down on how the owner thinks this particular business brings value to the industry as a whole. This insight could help to guide the business forward when it is under your ownership.
In business, it’s always best to be prepared. Focusing on the benefits of purchasing the business is surely important, and indicative of potential growth as well. However, you need to also be aware of the current challenges facing the business. If the owner mentions the constant need to hire and train new employees, that could be a sign of growth, or it could possibly be a red flag for poor management. Perhaps you learn that the business is struggling to keep up with demand or that contract negotiations do not run smoothly. Whatever the challenge, be prepared to develop solutions for these as the new owner.
As you consider purchasing a business, take the time to learn about its employees. Ask whether the owner has informed staff of the upcoming sale, as well as who intends to remain with the business after the ownership transition. In many family run businesses, it isn’t uncommon for at least a handful of staff to leave with the current owner. This is important to know before you sign the deal, so that you can prepare to hire and train new employees while you transition ownership. You may also want to ask if current employees have signed non-compete forms, when applicable, so that they cannot take their customers to a competitor for a period of time after the sale.
Don’t jump into business ownership unprepared. Before you make an offer on an existing business, it is critical to learn as much as you can about the business. Work with an experienced business broker to ensure you are not only asking the right questions, but getting the right answers. Once you have all the facts, you can move forward with a fair offer and be prepared for the benefits and challenges of business ownership. Contact a business broker today to begin the process of purchasing a business.