The Top 10 Questions You Should Ask Before Buying A Business

Buying a small to mid-sized California business can be a complicated process.  Once you go through the actual sales process, you actually have to run the business you just bought!  While being an Entrepreneur has its perks, it can also be challenging so before you decide to buy a business, you need to make sure you are ready for the challenge and that you have a thorough understanding of the company you plan to own.

I have been a part of many deals throughout my time in this industry and I can't tell you how often business buyers miss information about the company they plan to buy because they aren't prepared with a list of questions to ask.  Each transaction is different so ask additional questions specific to your own situation but here is a list of 10 questions to get you started.

Ask yourself these questions before starting the process of buying a business.  Once you find a business you are interested in, I've given you another set of questions to keep in mind as you do your due diligence.

Personal Questions to Ask Yourself before Buying a Business:

Is it the right time?

While being an Entrepreneur may be something you've always wanted to pursue, before you buy a business you need to be honest with yourself.  Evaluate your current circumstances and decide if it is the right time for you to take this leap.  As I said, the process can be challenging and demanding so keep your personal commitments in mind as you think this through.

Do I have the support of my spouse or significant other?

When you become a small business owner your schedule and your finances may change.  Make sure your significant other understands this and they are willing to support you if things don't go as planned. 

How much working capital do I have access to?

Having access to working capital is important to ensure you can keep the business running if you should incur unexpected expenses or changes in revenue.  I've seen people buy and run small businesses successfully without much working capital but it's always good to have a safety net and to be honest with yourself about the risks you're taking.

What do I want the business to do for me?

I suggest you decide early on what you want out of the business you plan to buy.  Some people buy businesses as a career move and plan to work at them daily.  Others buy businesses for a stream of residual income.  Decide what you want up front so you can look for a business that can accommodate you.

Questions to Ask About the Business:

Why is the owner selling?

Asking why the owner is selling is important for a number of reasons. For one, it may help you uncover problems with the company if the owner is selling because of declining sales or other problems.  It is also important because if the owner is in a hurry to get out you can use that information in your favor during price negotiations.

How did the owner arrive at the asking price?

Ask the owner what methods they've used to arrive at the asking price.  This can help you evaluate whether the business is fairly priced.

How much is the owner taking in salary?

Many people don't think to ask this and it is very important.  If the owner is taking a salary of $50,000 and you're accustom to living off of $100,000 per year you need to decide if you are willing to make the adjustment to your income or if the business can afford to pay you more.

What can I do to grow or improve the business?

Even if the company you want to buy is doing well, it can always do better.  Before you buy a business that is for sale you need to have an honest conversation with yourself as what skills and experience you can bring to the table that would grow or improve the business after you own it.

Is the seller willing to sign a non-compete?

Regardless of what the circumstances are for the sale, I suggest you get the owner to sign a non-compete if appropriate.  You don't want the owner to sell you his or her business only to open up shop down the street as your competitor.

What is my exit strategy?

Your exit strategy is probably the last thing you're thinking about at this point but I encourage you to consider it early on.  If you think about your exit strategy you can buy and grow a small business that will provide you with the opportunities you want today and in the future when you are ready for your next venture.

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business

Contributor:

Peter Siegel MBA, BizBen Founder, ProBuy, ProSell, ProIntermediary Programs

Areas Served: All Of California

Phone:  925-785-3118 Cell, 925-785-3118 Text

Founder Of BizBen.com (since 1994). I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I consult daily with buyers, sellers, and brokers daily about buying and selling California small to mid-sized businesses. Call 925-785-3118.

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Contributor: Joe Ranieri, Business Broker: LA, Orange Counties

Another commonly asked question is, "How long have they owned the business?" "Why are they selling?" is a question many buyers ask if the business was highly profitable, because, why would they want to sell something that was a cash cow? How long the owner has been in that current location can give a buyer some important information, especially if the seller has only been there under a year or so, which could be a warning sign. We as business brokers all know the same business that sells over and over every 2 years or so, because ultimately each owner can't make anything of it even with concept changes.

Contributor: Transactional Attorney

Great post, Peter.

I had the good fortune to grow the company I started directly out of law school over nine years to 200 employees and #25 on the Inc. 500 before we sold it. That experience gave me a very clear idea what I wanted (and didn't want) when I decided to acquire another business.

The questions I asked myself before I bought my next business are ones that any buyer can ask:

1. Is this a business I'll be proud of? Having pride in ownership is hard to put a value on but nearly every successful business owner I know is proud to be doing what they are doing. Don't make the mistake of buying a business you wouldn't be proud of purely on seller discretionary income, thinking that you'll grow to love it. You won't.

2. Is the industry a good fit for my strengths? I recently helped a client who was looking for a business in an area he knew very little about. While he's a bright guy, there was virtually no match between what he was already good at and what the business required.Buying a business is enough of a challenge already. You're not likely to know everything about the industry you buy into, but don't make your odds worse by getting into a space where you'll not only be learning how to be a business owner, but also learning the industry from scratch.

3. Am I comfortable with the Seller? Part of my job as a business attorney is to draft agreements that protect my clients if things go wrong. But even the strongest contracts can't prevent someone from suing you or guarantee a win if you have to take legal action.

If you are working with a Seller who is already making you feel uncomfortable for any reason before the close, there's a good chance you're going to continue to experience problems with that Seller after the close. As someone who has been on both the buy and sell side personally with my own businesses, I've experienced how we tend to put blinders on when we find a deal we think is the "right" one. It's important to take the blinders off and evaluate the deal and the seller parties realistically. Trust your instinct and don't be afraid to walk away from a deal where the seller is being non-responsive, evasive or putting pressure on you to sign before you're ready.

Contributor: Business Broker: LA County Area

Terrific thoughts here, thank you Peter. The one question I see buyers often overlook is the subject of working capital. New business owners get so focused on raising funds in order to look attractive to sellers, and doubly focused on crossing the finish line in the deal, they often under-estimate their capital requirements. We closed escrow recently on a retail deal where the buyer didn't believe much added cash would be needed after closing. But in the first 6 months, a lengthy illness forced the owner to hire added help and a key employee got pregnant, adding to her payroll woes. She's still trying to recover. Make sure you either have adequate cash on hand, or access to adequate cash in a pinch.

Contributor: Timothy Cunha JD: Business Broker, SF Bay Area

Ironically, the Exit Strategy is one of the more important considerations when purchasing a business. It ranks right near the top of the list along with "What can I do to grow or improve the business?" That's why as a Certified Value Builder, I offer business owners preparing to sell their business and new owners who have just bought a business my consulting services utilizing The Value Builder System. Through a structured systematic monthly approach, all aspects of the business are evaluated and specific tactics are implemented and monitored for a strategic approach to growing the value of a business. The focus is on both current profit and long-term value enhancement when the business is ultimately sold.

When I started my computer technology company a few decades ago, my goal was for a merger, acquisition, or IPO within five years--that was the goal we always kept in focus. Almost five years to the day, I consummated a very lucrative merger of my company into the industry leader at the time. Managing the company with the "endgame" in sight and the building of maximum value as the goal results in a much more efficient, effective, and successful enterprise, both in the short-term and the long-term.

Contributor: Business Broker, Northern California

Buying a business or practice is indeed like taking a personality test. A personality test reveals people's strengths and weaknesses including how they respond to different situations. Most business sellers only sell one or two businesses in their life time while most business buyers also only do this once or twice in their lifetime.

I was recently working with a business buyer who had been looking to buy a business for 18 months. He said he was so pleased to work with me as I took the time to break things down and explain them to him. However, when it came to him making a reasonable offer with a reasonable set of terms for the deal he wanted everything in his favor. Needless to say after 4 months of working with the buyer the deal fell through as the seller wasn't comfortable with all the buyer requirements.

It sounds a little unusual but a good deal is normally when the seller thinks the buyer is getting it all their way while the buyer thinks the seller is getting it all their way or as I like to observe, a good deal is when neither the buyer or seller are happy which means the deal is probably fair to both parties.