Purchasing an existing business is an enormous undertaking that requires much consideration. Conducting your due diligence about the short list of businesses you’ve had a chance to make is a crucial step throughout the entire process.
When it comes to purchasing a business, no question should go unanswered. Conducting the right amount of due diligence is the key to buying the business of your dreams. Various types of questions accompany this process to give you a clear picture of what’s ahead.
These questions will help you examine every aspect of the businesses you’ve narrowed down during your search. Some of the information you’re likely to inquire about fall into a couple of different categories:
To prepare for what’s ahead, let’s dive into these questions and how they can benefit you as the buyer.
Some of the personal questions are more introspective - you want to ensure this is your path before the ink dries on the contract. Review each question and answer them as honestly as possible, and you’ll feel more prepared.
For the buyer
Why is this your goal?
Before signing the purchase contract, take time to think about why you’re buying a business, especially the one you’ve set your sights on. Do you have previous experience in the same industry? Do you think you can add something to the business? Or is this purely for financial reasons, hoping the business makes a good return?
Take a hard look at the answers you provide. If they don’t pass muster, take a step back and reevaluate the reasons for buying the business to see if it’s truly the right path.
Why buy instead of build?
Maybe “build” isn’t in the literal sense of the word, but the question remains. Why did you choose to purchase a particular business rather than starting one? Weigh the pros and cons of starting a new business versus buying an existing one to see if you may want to change course.
For the seller
Why are you selling?
The owner will have a reason for selling; sometimes, it’s important to know what it is. Owners often sell their businesses for legitimate reasons, such as retirement or moving to a new city.
However, in rare instances, you can discover something more sinister, such as problems the business is facing. Though the issues may not be a show stopper, it’s best to know them before the purchase is complete.
How long have you owned the business?
How long the current owner has owned the business will say a lot about how well it’s doing. This is especially true for a business that has switched hands in the past. The longer each owner stuck around, the better for the business and future growth.
How many hours of work are required each week?
Understandably, a business requires time and energy, but before you commit, it’s good to know exactly how much time. Of course, the amount of hours spent at your new business will vary; you have to find one that provides an average you’re happy with. Maintaining a work-life balance is also important.
Does the owner believe their success is due to business loyalty or the personal loyalty of the clients?
Customer retention is the key to a thriving business, making this an essential question to pose during the process. The seller should know whether their clients are there because of who the owner is or the business itself.
Having this knowledge will give you an advantage during the transition. Building customer loyalty can start right from the get-go, so use this answer as a way to start your plan.
What’s your current take-home pay?
Though a business owner's primary concern is to ensure the business is thriving and bringing in cash, you’ll want to know how much the owner pays themselves before committing. The owner should not be surprised to hear such a question; after all, even entrepreneurs have mouths to feed.
Is training provided?
This question isn’t one most buyers think of as they start the process of buying a business, but it is vital. Even with industry experience, there are always new things to learn about the business. If you plan on successfully starting the business, you want to prepare yourself for any upcoming training. Work with the seller to find common ground as long as you get the information you need.
This is the time to dive into some of the nitty-gritty surrounding the business. These questions should paint a clear picture of how the company operates year-round.
Are there any pending lawsuits?
It sounds a bit straightforward, but it’s a crucial question overall. Purchasing a business with a history of legal trouble could spell issues down the road. It also means that building a customer loyalty base might prove more difficult since the reputation may have been hurt in the past.
What permits and licenses do I need to renew, and when?
Typically, businesses in any industry must obtain permits or licenses to operate legally. Getting the details directly from the seller will save time and even potential legal issues as you go through the purchase process.
Is there a current business plan?
Along with this question, ask whether the business plan is successful. In some instances, a current business plan could give you more insight into why the seller decided to leave the business or what future potential it holds.
Are there any key employees?
Good employees are worth their weight in gold. If you plan to replace certain employees or teams during the transition, you must know who kept the business running and how. Some individuals have years of experience, which cannot be taught quickly, and it might prove prudent to keep those employees.
Who are the major competitors?
Ask the current owner who the major competitors are as you build a plan to buy the business. Find out what areas the business’s competitors excel at and if the business has any advantages. Since all businesses have competitors, knowing who they are and whether they are direct or indirect will give you a step in the right direction right at the beginning.
Don’t forget to ask about some of the most crucial parts of owning a business: the finances. It’s no secret that new and established entrepreneurs buy a business to make a profit. The key is understanding where the business is before continuing on the journey.
What are the yearly gross revenue and profit margin?
This knowledge will let you know whether the business is successful and how much you can expect to make in the near future. An honest business owner will have that information on hand, mostly in the form of various financial statements, so don’t hesitate to ask the hard questions.
Does the business use cash or accrual accounting?
Knowing the answer to this question will save you from some messy books down the road. Though each type of accounting has its benefits, accrual accounting does a better job of disclosing the profits and losses of a company since it records income and expenses right away. Cash basis accounting waits until the transaction is complete before the transaction is recorded.
Whatever type of accounting the company uses it will help make future decisions. You can continue using the same one or change it right at the beginning. It will also show you how accurate any disclosed profits or losses are.
Do they think their accounting books are healthy?
Though you want to trust a business owner to be honest, the best they can do to prove the answer to this question is to provide three to five years' worth of accounting information for scrutiny. Find an accountant who will review all the details, including tax returns, balance sheets, cash flow statements, payroll, and more. They can give you their insight into the business’s accounting practices.
Has the valuation been reviewed?
Once a business owner decides to sell, their first step is usually to complete a business valuation. Completing this process gives them an idea of what price to ask for on the market, but that doesn’t mean it has to be taken at face value.
Whether you agree with the assessment or not, you should find out whether an external auditor has reviewed the numbers and provided their opinion. Though you might have a way to finance the asking price, there is no use in overpaying if that is the case.
What assets come with the business?
Don’t forget to ask about tangible and intangible assets. Before the sale, you want to have a thorough inventory of all assets that come with the business. This will give you an idea of whether anything needs replacing right at the beginning.
You decided to embark on a new journey of owning a business. There’s hope for growth, profits, and the amazing journey of working for yourself. However, you need to start that adventure on the right foot.
Whether you started the process on your own or through a market like Smobi, asking the right question from a personal, business, and financial point of view will paint a clear picture of the strength of the business and your new role. Take the time to review some of the questions above and ask as many as you need to before the deal is done.