So you’ve found a business you’re interested in purchasing on our search portal for businesses for sale. To determine if it’s right for you, you need to dig a little deeper.
Entrepreneur and aspiring business owners face this path often during their lives. To buy or not to buy? With any sort of business venture, there are risks involved. Here are 12 questions you should always ask yourself before buying a business.
Why do you want to buy this specific business?
You might have a simple answer to this question, maybe you are in the industry or as the location. Maybe you think you can do it better than the current owners and grow revenue by 2-3X. Everyone has their reasons but when you are facing any large investment decision, you should always take bias out of the equation and think from an objective point of view.
Forget about what you like about this business and think about what you don’t like about this business? If you are looking at a retail store, do you have the patience to do deal with individual customers? You have to be truthful to yourself and if you truly don’t like the answers, then look for another business opportunity.
How will you make this business a success?
What are your business strengths, skills, or special knowledge that will make this business more successful? If you have website design skills and see an opportunity to turn a brick and mortar store into a successful online store makes business sense. Now is the time to work out what value you can add to this business opportunity. If you cannot do it better than the current owners, then it may be better to focus your efforts on another industry or business type.
Common methods to add value include improving systems and processes within the business, marketing the business online, and changing the overall strategy. If the business has poor reviews, then this is an area where you can improve Social media marketing can be a cost-effective way to add value.
How will you fund this business purchase?
Prior to purchasing a business, you need to work out how much you can afford to put towards a business. Make sure you consider working capital needed to cover expenses such as payroll, inventory, utilities, rent, etc. Analyse your current financial cash flow in-depth and determine how much you can afford for a business + working capital. Once you have this you can determine with ease as to whether you will be able to afford this business opportunity or not.
What is this business worth?
The real value of any business is equivalent to what buyers are prepared to pay. During the research phase, you should establish the prices paid for similar businesses in the recent past for the same industry or research industry-standard valuation multiples.
Valuation based on net worth: Calculating a business’s net worth (i.e. assets minus liabilities). This method may be useful for businesses where there is no goodwill.
Valuation based on annual net profit: Research into the standard valuation for the industry of this business (ie. 3X) and multiple this to net profit.
What are the sellers of the business looking for?
One significant aspect of purchasing a business is speaking to the current owner to gain a better understanding of the business as a whole. After you’ve identified a business you’re interested in buying, you should send a letter of intent to the owner outlining your proposed price and the terms and conditions of the sale and sign a confidentiality agreement.
Speak frankly with the business owner or business broker selling the business and determine what they are looking for? Is it a quick sale? Are they hoping for the best price and prepared to wait?
Do the financials honestly reflect on the performance of the business?
Make sure you receive access to their statements from the last three to five years, including tax returns and any current contracts or leases. Make sure that these statements have been audited by a real and reputable accounting firm. Take these financials to your accountant and review them thoroughly and do not assume that their financials are 100% truthful.
If the business’s financial statements have not been reviewed or compiled properly, ask for the current owner’s permission to conduct an independent audit of your own. If the owner refuses, they may be hiding something, which means that you might want to walk away from the sale.
What is the current state of the business?
Now is the time to figure out what would drive this owner to sell their business. Ask them questions and drill them if you are not receiving satisfactory answers, you can always walk away but once you sign and purchase the business, it is much harder to walk away especially if there are debts. If you start feeling anxious after this discussion, it may be wise to trust your gut. There are always reasons why owners decide to sell, check out
You will want the know the honest answers to these questions:
- Why are they selling?
- How many hours did they work per week?
- What is the current cash flow?
- What are the lease agreements? and do they own the property?
- Who are their suppliers and customers?
- Do they have a system that is easy to take over from?
- Is their business organised properly and can you foresee issues taking over?
- Do you have any past, current or pending lawsuits?
Is the seller telling the truth?
Don’t just take the business owners’ word for it, try to verify their claims. Sit in their business or outside for hours at a time and see how many clientele they have and extrapolate that data. If it it seems awfully low, it may certainly be the case.
Ask his employees trick questions such as how many customers do you have? You will need to be creative to see verify the business owners’ claims.
What happens after you purchase the business?
Ask the business owner if they would help during the transition and for how long.. Check in with the employees and determine what will happen to them once the sale is final. Will you be keeping all of the employees? Will you keep some and let others go?
It’s also best to speak with the employees once it appears the sale will happen and answer any of their questions regarding the sale and the business’ future. In many cases, former employees will be vital to a successful transition and may prove invaluable even after the transition as they hold a lot of the operational know-how.
Will you lose clients during the changeover period?
If this business has a portfolio of clientele, ask to see its current client list and inquire about the status of each account. You want to ensure that you are purchasing a business that has continued goodwill and that the current owners are leaving you with a portfolio of workable accounts that have the potential to turn a profit.
It is not unheard of that clients end up going with the previous business owner due to their strong relationships. Once the changeover begins, it is important that you shore up those relationships and keep those clients in bed.
What is your exit strategy?
If this business acquisition does not perform as expected, what is your plan for the exit? Is there equipment which you can sell to recoup your costs? Is there goodwill in the brand or its assets (websites, design, patents)? These are not questions you would typically ask but it is imperative that you know the answer to this question prior to purchasing a business. While businesses can bring lots of prosperity, they can also go belly up.
Make sure you’re consulting with an experienced business lawyer throughout the process, preferably one which specialises in dealing with business acquisitions/purchases. When purchasing a business, always do your due diligence.