Essential Questions to Ask: A Business Buyer’s Checklist

Buying a business is an exciting venture, but it’s also a significant investment of time, energy and ultimately capital. Before diving headfirst, thorough due diligence is crucial. Preparing yourself and asking the right questions upfront can help you understand the business’s true potential and identify any potential red flags. Here’s a list of steps to take and essential questions to ask when buying a business: 

Prepare for the Journey: 
  • Know Yourself: Take inventory of your buyer values. These are your strengths, weaknesses, skills, goals, ideal model and ideal role.  
  • Be flexible: There is no perfect business. Know what you must have and will not accept, and don’t lose a deal over the rest.   
  • Beware of Dream Stealers: We all have well-meaning people in our life. Beware of the ones who offer advice on something they have not accomplished themselves. 
  • Know your limits: Clean up anything that may get in the way of obtaining financing. Then talk to a couple of reputable commercial lenders about what you want to do.  
  • Learn the game: If you have not owned a business before you have a lot to learn. The SBA offers a wide range of services designed to help the small business owner, many for free.  
  • Pack a lunch: Most entrepreneurs never acquire a business largely due to being ill-prepared, having unrealistic expectations, and not being patient. Before starting your journey know that it may take a year or two before you find “the one”.  
Financials and Operations: 
  • Financial Performance: Analyze historical financial statements, including revenue trends, profitability margins, and operating expenses. 
  • Growth Strategy: Understand the seller’s vision for future growth and their plans for achieving those goals. 
  • Customer Base: Evaluate the customer base, its diversification, and customer acquisition and retention strategies. 
  • Inventory Management: For businesses with physical inventory, inquire about inventory control systems and turnover rates. 
  • Operational Efficiency: Assess current processes and procedures for key business functions. 
Legal and Regulatory: 
  • Legal Issues: Uncover any existing legal disputes, outstanding debts, or potential liabilities the business faces. 
  • Regulatory Compliance: Ensure the business is compliant with all relevant industry regulations and licensing requirements. 
  • Contracts and Agreements: Review all contracts with vendors, partners, employees, and leases for potential risks or limitations. 
  • Intellectual Property: Identify and understand any intellectual property owned by the business, such as trademarks, patents, or copyrights. 
People and Management: 
  • Management Team: Evaluate the experience and capabilities of the existing management team. Will they stay on board after the sale? 
  • Employee Turnover: Investigate employee turnover rates and reasons for employee departures. 
  • Employee Benefits: Understand the current employee benefits structure and its potential impact on your future budget. 
  • Organizational Culture: Assess the company culture and whether it aligns with your leadership style and vision. 
Looking Forward: 
  • Reason for Selling: Understand the seller’s motivation for selling as it may reveal underlying issues within the business. 
  • Post-Sale Transition Plan: Discuss the seller’s plans for transitioning the business to new ownership and their level of involvement in the future. 
  • Future Capital Needs: Identify any upcoming capital expenditures or investments needed to maintain or grow the business. 
  • Exit Strategy: Consider your own long-term goals. Do you plan to run the business for years to come, or do you have an eventual exit strategy in mind? 
Additional Tips: 
  • Don’t be afraid to ask follow-up questions: Seek clarification on any unclear points or areas that raise concerns. 
  • Consult with professionals: Engage with a business broker, lawyer, and accountant to analyze the business and advise you on the legal and financial aspects of the purchase. 
  • Conduct due diligence: This goes beyond financials and should encompass all aspects of the business. Take the time to investigate and understand the full picture before deciding. 

By taking these steps and asking these essential questions and conducting a thorough review, you’ll be well-equipped to make an informed decision about buying a business. Remember, knowledge is power. The more you know about the business, the better positioned you’ll be to negotiate a favorable deal and achieve long-term success. 

 

Photo by Jon Tyson on Unsplash