10 Questions to ask when buying an existing business
If you are in the process of purchasing an existing business, then there are some key questions which need to be asked before any agreements are made. Conducting some proper research before concluding any sales agreements can save you as the potential buyer a whole lot of money. We have put together some questions which we think are important in assessing if the business you intend purchasing, is the right fit for what you want to do.
- Why are you selling this business?
Business owners will sell businesses for various reasons. Be it retirement or just moving on to the next thing, health issues, or having just outlived his/her business. When purchasing or buying into an existing business you need to be very clear that the owners are selling for the right reasons. Don’t be afraid to ask the hard questions when negotiating the terms of sale.
- What are the biggest challenges for this business and industry?
Owners of an existing business would or should know in advance what challenges they would face in the short-, medium and long-term if this is a well-planned business. You do not want to buy into a business which would require an amount of R10-million in improvements only to find out about it later on.
- What would the business owner(s) have done differently?
Existing business owners most often have started their business from scratch. They have learnt some hard and expensive lessons along the way, commonly described as the Paying school fees to the University of Life. Business owners and active operators of the business which is up for sale should know what they could have done differently. This could assist you in determining what growth opportunities exist for this business. This also allows you to identify which untapped markets and marketing opportunities are available to exploit.
- How did the owner(s) determine the selling price? What is it based on?
Most often existing businesses are sold based on how much the owners want out of the business, or what they believe they have put into it over a period of time. These are arbitrary factors which do not value a business correctly. If arbitrary factors were used to determine the selling price, then it leaves a lot of room for negotiation. Asking a qualified business assessor to value a business might cost a bit. It would, however, be a wise decision to take to get a more accurate estimation of the business value. This would normally include, assets, stock, operational expenses (including salaries), debtors, goodwill, etc.
- If the existing owner(s) cannot sell the business what would they settle for?
This question is already asked in question 1. Getting into the seller’s mind and future plans always give a buyer room for negotiation.
- Does the business have audited financial statements? Are they available for assessment?
A business which is up for sale has to have audited financials to show how it made or lost money (profit and loss) in any particular financial year. There needs to be a clear paper trail of money going in and out to assess how successfully the business was managed or operated. If the seller has unrecorded income and expenditure, then as a rule of thumb is this not a business to invest in.
- Does the business have any past, pending or potential lawsuits or bad debts?
Without having to state the obvious, do you not want to invest time and money in any business which might have pending lawsuits or bad debts. The seller needs to confirm in writing if any such situations exist and that the owners take responsibility for any which might occur after the sale is concluded. The contract of sale should also be very clear about this matter.
- Does this business have documentation including a business operating manual and financial projections?
Most often a business which was started from scratch does not have any operations documentation. This might have worked well for the existing owners, but a new person taking over might battle. The current owner (seller) should be willing to work with the new owner (buyer) or be involved in the business over an agreed period of time after the sale is concluded.
- How much does this business depend on key customers and vendors (suppliers)? Who are they?
If the existing business for sale has a select few clients or suppliers, then that is a big risk on the buyer as client and supplier loyalty cannot be guaranteed. Buyers of any existing business need to be absolutely sure their client base and suppliers will remain 100% behind this business post-sale. It would also be a good idea to investigate opportunities to secure new business from new clients and also strengthen the supplier database (supply chain).
- How will employees respond to the sale? Will they stay or will they leave? Are there employees whom you have identified who can stay or leave?
When any business is up for sale there is always a certain measure of uncertainty from the existing employee base. It will be the responsibility of the seller and the buyer to manage and ease the tensions which might exist as the good employees will immediately seek alternative employment and the not do good ones will stay to see what happens. That is not what you as a buyer need. Make sure you keep the good apples and let the bad ones go…