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8 Essential Questions to Ask When Buying a Business
by Fundid on Jun 22, 2023 9:31:00 AM
If you're considering taking the leap into business ownership, purchasing an existing business can be a great way to get started. Before signing on the dotted line, however, it's essential that you ask the right questions and understand every aspect of what you'd be buying. From assessing risks to getting legal advice, there are many factors that must be taken into consideration before deciding if buying a business is right for you.
However, with some strategic questioning and thorough research in advance of committing any funding or resources towards your purchase, you'll have a better chance of success when aiming to buy a business. Read on for our list of 8 essential questions to consider asking when looking at potential businesses for purchase!
Benefits of Purchasing an Existing Business
As an aspiring business owner, you may have considered starting your own venture from scratch. However, purchasing an existing business presents several advantages worth considering. Not only will you inherit an established customer base, but you'll also have an established brand and reputation, an existing inventory, and a proven business model.
Additionally, you'll be able to skip the initial start-up phase and avoid some of the common mistakes new business owners make. While buying an existing business requires a significant investment, the potential benefits may be well worth it. By acquiring an already existing business, you'll be able to hit the ground running with minimal downtime and set yourself up for long-term success.
Related Reading: Your Guide to Buying a Small Business
8 Questions to Ask Before Buying a Business
Before you commit your time and energy to purchasing an existing business, it's important to ask the right questions. To ensure you make an informed decision, we've compiled a list of the top questions we think you need to ask. These questions cover a range of topics, including the owner's reasons for selling, the financial health of the business, and the future growth potential. By asking these questions, you'll gain valuable insights that will help you make the best decision for your future as a business owner. Let's get started!
1. Why is the Owner Selling the Business?
Asking this question is the first step in understanding the current state of the business. Perhaps the owner is retiring, or they have decided to pursue a new venture; either way, their reasons can have a significant impact on the future of the company. Understanding why the owner is selling can give you insights into potential challenges or opportunities you may face as a new owner.
2. What is the Current Financial Situation of the Business?
Before making a decision, it's important to understand the business's financial status. Requesting financial records such as income statements, balance sheets, and cash flow statements will give you an idea of its profitability, debts, and overall revenue. This information can help you determine whether the business is worth the investment and identify areas for improvement.
Related Reading: The Top Three Financial Statements You Need to Know
3. What is the Reputation of the Business Within its Industry?
Knowing the reputation of the business can help you understand its position within its industry. Researching the company's reviews, ratings, and customer feedback will give you insights into its strengths and weaknesses. Understanding how competitors view the business can also help you identify areas where you can add value as the new owner.
4. What is Included in the Sale?
It's important to know exactly what you're buying when you purchase a business. Assets like equipment, inventory, intellectual property, and trademarks should all be included in the sale. Knowing these details can help you create a comprehensive business plan and budget.
Common items included in the sale of a business:
1. The business itself – This is the most obvious item that will be included in the sale of a small business. The buyer will be purchasing the business, including its name, goodwill, customer list, inventory, equipment, and leaseholds.
2. The business’s financial records – In order to properly assess the value of a small business, the buyer will need to have access to the business’s financial records. This includes tax returns, profit and loss statements, balance sheets, and bank statements.
3. The business’s contracts – Any contracts that the small business has in place will need to be transferred to the new owner as part of the sale. This includes contracts with suppliers, customers, employees, and landlords.
4. The business’s licenses and permits – If the small business has any licenses or permits that are necessary for its operation, these will need to be transferred to the new owner as part of the sale.
5. The business’s intellectual property – If the small business has any intellectual property, such as trademarks or copyrights, these will need to be transferred to the new owner as part of the sale.
6. The business’s physical assets – Any physical assets that are owned by the small business, such as buildings or vehicles, will need to be transferred to the new owner as part of the sale.
7. The business’s inventory – If the small business has any inventory on hand, this will need to be transferred to the new owner as part of the sale.
8. The seller’s non-compete agreement – In order to protect the buyer’s investment, it is common for sellers of small businesses to sign non-compete agreements preventing them from starting up a similar business in competition with their former company.
5. How Will the Transition be Managed?
Before you've closed the deal, you'll need to plan for a smooth transition. You should ask how the current owner plans to handle the transfer of ownership and whether or not they'll be available to assist during the transition period. It's also important to understand if there are any current contracts with vendors or customers that you'll need to take over.
6. What are the Potential Growth Opportunities for the Business?
The success of a business often depends on its ability to expand and generate more revenue in the future. Asking about potential areas for growth can help you determine if the business is worth the investment. Identifying untapped markets or possible expansion of current products or services can contribute to the growth of the company.
7. What are the Business's Current Technology Needs?
It's helpful to assess its technology needs to determine any potential investments in upgrades or improvements. Don't let the current state of technology deter you from buying a business that shows great potential. Instead, use this factor as a negotiation tool to secure a better price for the sale. Keep in mind that technology upgrades can often lead to increased efficiency, productivity, and profitability. Knowing what needs to be upgraded or improved before finalizing the sale can save you valuable time and resources in the long run.
8. What are the Business’s Current and Historical Employee Retention Rates?
Understanding the staffing trends can give you insight into the potential challenges or strengths that come with the business's workforce. If the business is located in a college town, high staff turnover may be relatively common, and you need to be prepared to adjust your hiring and training strategies accordingly.
Alternatively, suppose you find that there are trusted staff members who have been with the company for the long haul. In that case, you may have valuable assets already in place that can help smooth out the transition and build continuity in your operations.
Related Reading: How to Hire the Right People For Your Business
Start Your Entrepreneurial Journey on the Right Path!
Purchasing a business is an exciting and challenging experience for any entrepreneur. However, by asking the right questions, you can ensure that you're making a sound investment. The 8 essential questions discussed in this guide are designed to help you gain insights into the business and its operations. Understanding the owner's motivation, financial status, reputation, assets, and the transition process will help you make an informed decision and create a successful business plan. Subscribe to our newsletter to get weekly tips on growing, funding, and marketing your business.