Buying a Business

9 Key Questions a Prospective Business Buyer Should Ask the Seller

Starting a new business is an exciting and unpredictable journey. Acquiring an existing business can provide a shortcut to success. But before you jump in and confirm the purchase, it's integral to ask a few essential questions to ensure that you make an informed decision. These questions will help you understand the business better and take the appropriate steps to mitigate any risks that might arise. 

So, let's get started with the seven key questions you should ask before committing to an acquisition. By being thorough and taking a thoughtful approach, you'll have everything you need to make the right decision for your future business.

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#1. Why Are You Selling Your Business?

This is an important question to ask, as it will give you valuable insight into the seller's motivation for selling. Understanding why they're parting with their business can help uncover potential opportunities or risks that may be associated with the purchase. Was it a financial necessity? Are there legal issues at play? Or maybe the owner wants to move on and pursue other interests.

Why Small Business Owners Sell Their Small Businesses

  1. Retirement: Many small business owners sell their businesses as part of their retirement plans. They've spent years building up a successful enterprise, and now they're ready to enjoy the fruits of their labor.
  2. Change of Interest or Lifestyle: Business owners may decide to sell if their personal interests or lifestyle needs change. They might want to pursue a new passion, spend more time with family, or relocate to a different area.
  3. Health Reasons: Health challenges can make running a business difficult, leading owners to sell.
  4. Burnout: Running a small business is demanding. Over time, the stress and long hours can lead to burnout, prompting an owner to sell.
  5. Partnership Disputes: Disagreements among partners can sometimes be resolved through the sale of the business.
  6. Financial Difficulties: If a business is struggling financially, the owner might decide to sell before things get worse.
  7. Opportunity to Cash In: If the market conditions are favorable, a business owner might decide to sell and make a significant profit.

#2. How Profitable Is the Business?

Profitability is a key factor to consider when deciding whether or not to purchase a business. Be sure to ask your seller for detailed financial documents, such as income statements and balance sheets, so you can get an accurate picture of the company's finances and evaluate its profitability over time.

So, how do you know if a business is profitable? One way is to look at the company's income statement, which details income and expenses over a specific period. If a company has more income than expenses, it should generate a profit. Additionally, examining the company's cash flow statement can also provide insight into its profitability. However, keep in mind that profitability isn't the only metric that matters, so it's essential to analyze the financial health of a business holistically.

#3. What Are the Assets Included in the Sale?

Knowing exactly what assets are included in the purchase of the business is of utmost importance. The potential range here is vast and could include physical property, inventory, copyrights, trademarks, and other intangible items. Being aware of the specifics will help ensure a successful transition down the road.

Carefully examine if any hard as well as soft assets will be transferred to you when completing the sale. In addition to tangible products like furniture or production equipment, pay close attention to details regarding insurance policies, customer and supplier contacts, software licenses, and terms of existing contracts – anything that could impact your ability to carry out business in the future seamlessly. Uncovering all available information upfront can help you make an informed decision now and secure potentially forgotten assets for use afterward.

#4. How Have You Arrived at the Asking Price?

Understanding how the seller has valued their business can reveal its true worth and give you an edge during negotiations. The asking price of a business is determined by factors like historical financial performance, the value of assets included in the sale, and current market conditions. To ensure you get the best deal possible, ask your seller how they arrived at their asking price. This is an opportunity to negotiate if necessary so that both parties are satisfied with the outcome.

Don't forget to factor in the cost of any additional services you'll need moving forward. For instance, will you require an attorney to look over the contract? Do you have enough funds set aside for inventory and other expenses? By accounting for all costs, you can be sure that you are getting a fair deal.

#5. Are Employees Included in the Sale?

Employees are the lifeblood of any business, so it's critical to understand the current staffing situation before you commit to an acquisition. Are employees included in the sale, or will you be responsible for hiring a new team? How many employees do they have? Do they have any special skills and knowledge that could benefit your company's operations?

Be aware that if you are taking over existing personnel, the terms of their employment may need to be renegotiated. This could involve offering new job titles, salaries, and benefits. Taking over an existing team can help ensure a smooth transition and minimize disruption to operations during the process.

#6. What Are Your Current Customers Like?

Customer relationships are often one of the most valuable assets of a business. Ask the seller for information about their existing customer base, including demographics and average order size. This will give you an idea about which markets to target, as well as who is currently buying from your future business.

You may also want to inquire about customer loyalty programs or other incentives that could be used to retain customers.

Related Reading: 6 Ways to Attract New Customers to Your Business

#7. How Would You Grow the Company?

Review the seller's long-term plans for the business. How would they sustain and grow operations in the future? Do their ideas align with your vision for the company?

This is a great opportunity to gain insight into potential revenue streams. Consider exploring any innovative approaches that could set you apart from competitors and appeal to new customers. Understanding how your seller intends to move the business forward can help you make better decisions and position you for success post-sale.

#8. Are You the 100% Owner of the Business?

To complete the purchasing process, you will need to ensure that you are actually buying the business from the owner. You should double-check that they have all legal authority over the company and no other parties need to be consulted before completing the sale. If there are multiple owners, make sure all of them agree on the sale and provide their names in any legal agreements needed.

#9. How Many Hours Do You Spend Running the Business?

Knowing the current workload of the business is essential. You'll need to understand how many hours a week or month you'll be expected to commit to managing the company. Asking about their current time investment can provide valuable insight into this and help you set realistic expectations when transitioning into your new role as owner.

It's also important to inquire about what tasks the seller currently handles and if any services are outsourced. This will help you assess what activities will need to be taken over once the sale is complete. Knowing this information ahead of time can make it easier to transition into your new role with confidence.

Make the Transition to Business Owner Seamlessly

Being sure to ask the essential questions covered in this list will help you on your journey to successful business ownership. With the right mindset and preparation, anyone can become a successful business buyer. Remember to trust your gut, trust the process, and always seek expert advice if needed - it could end up saving you time, money, and headaches down the road. Take advantage of resources like our weekly newsletter for more helpful tips and guides as you become an entrepreneur through acquisition.

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