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5 essential questions to ask when buying a business

5 essential questions to ask when buying a business
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Is there a business that you have your eye on” Being a business owner can offer you financial freedom and a solid platform to express your business ideas and innovations.

But buying a business is a huge financial commitment, and it could change the course of your life irreversibly….for better or worse. It is vital that you really get to know the ins and outs and the business that you’re looking at buying, so you get a realistic idea of what you’re in for. The more questions you ask, the better, and five absolutely essential questions include:

Why is the seller selling the business?

There are very few business owners that would want to let go of a thriving, successful business, especially in this economy. So what are the real reasons for the seller looking to sell” Of course, they could offer you the vague answers of wanting a change of scenery or planning to retire, but you should get a feeling as to whether this is the real reason or not. Obviously, sellers will not lay out all the underlying issues and reasons for the sale to potential buyers.

Try to look deeper than the surface level and assess possible reasons why the business is being sold. There could be too many competitors entering the marketplace for this particular business to continue its trajectory. The area in which it’s in could be becoming rundown, and the customer stream could be trickling. It could even be as simple as an altercation with a staff member, which will have zero effect on you when you buy the business.

Use professional guidance to assess the true reason for the sale, and decide whether you have the resources and skill to fix any potential problems and issues.

What is included in the sale

Do not ever purchase a business without knowing exactly what you’re getting in terms of the sale. You should enquire beyond a mere list of assets and get down to the nitty-gritty of knowing whether the desks, equipment, and even decor is included in the sale.

Another thing you’ll want to know is included or not is training. Most business owners provide some sort of training to the new owner, so they are not left in the lurch when learning how things are run at their new business. This training/ transition period is incredibly important as you get to know your new staff and learn how things have been running. Of course, you can make your own tweaks here and there, but you don’t want to get thrown in the deep end on day 1.

Most businesses should include this basic training with the sale, but some do charge an additional fee. Be sure that you know exactly where you stand when it comes to training and what is included in the sale of the business.

How was the price established

Don’t be shy to ask the seller how they reached the current asking price for the business. The seller should be able to back up their reasoning with the necessary financial data, as well as intricate pros and cons that the business offers. The more insight you get into why the business owner thinks their business is worth the asking amount, the better.

It’s important to discuss the price as well as the determining factors that helped establish the price with a financial advisor, who will be able to tell you whether it’s a fair price or if you’d be entitled to ask for a lower price and negotiate with the seller. Get your team to provide an independent valuation based on financial records, assets and business history to come up with a figure of what they think the business is worth.

Is the seller willing to set up a non-competition agreement?

What some business owners do is sell their current business and use the money as capital to start a new, competing business that is bigger and better than the last. They take with them insider industry information and knowledge, loyal clients, and may even poach the staff and suppliers of their previous business once their new business is up and running.

This can be truly devastating to the new business owner, and the expected business trajectory and income can be completely thrown out the window if this were to happen. This is a truly sneaky move on the part of the previous owner, and the only real way to prevent it is to get them to sign a simple non-competition agreement. If they refuse to sign it, this could be a major red flag and warn of issues to come from them in the future.

This non-competition should be somewhat time-related, as well as bound to certain geographical areas, thus not preventing the previous owner from setting up a similar business in a different territory that would not compete with yours.

What are the biggest challenges facing the business?

Be wary of a business owner that presents no challenges and wants you to believe that you are buying the perfect business. There is no such thing as a perfect business, as every company has unique issues and challenges that need to be overcome.

List all of the challenges and think of ways that you could possibly overcome these challenges or deal with them. Challenges could include anything from organisational issues to marketing struggles to issues with staff. You may be excellent at dealing with certain challenges, while others may make you crawl the walls. The biggest issues to be wary of are those of cash flow.

You may also want to ask what time of year is the busiest and most stressful so that you can properly prepare yourself and perhaps even get temp staff for these busy times. When it comes to buying a business, the more information you have, the better.

Be sure also to ask a few industry-specific questions of your own and look over all financial records with a financial advisor before making the final decision about buying a business.

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