Don’t get us wrong, buying a company is a scary process. You’re about to spend a large sum of money on a company that you probably don’t know in an industry you may not be familiar with.
Despite that, buying a company should never be a gamble. With the right amount of research, due diligence, and attention to detail, you should feel confident laying down money for your new business.
Knowing what questions to ask is a crucial aspect of being an Acquisition Entrepreneur. Many deals can seem great at face value, but once you dig a little deeper you realize that one aspect or another of the business makes it an unattractive target.
In many ways, asking important questions is less about finding a good deal than it is about disqualifying bad ones. It helps you determine what aspects of the business may need work, it helps you figure out where there may be gaps in your employment structure, and it helps you decide if a company is nothing more than a lemon.
So, without any further ado, here’s a list of 15 important questions to ask when buying into a business.
1. Why Are They Selling The Business?
This is always the first question you should ask and one of the most important questions to ask a business owner. Depending on the answer, it could change how you go about making changes to the business (or whether you make any at all). If you get the wrong answer, you may think twice about agreeing to purchase the company.
For example, if the seller explains that the company’s finances are their main reason for selling, that’s an instant red flag. But if the seller is getting out because they want to retire, it could be an ideal situation.
Other acceptable reasons for selling a business may include: relocation, family obligations, or health concerns. In general, these reasons will be unrelated to the actual business itself.
If the seller seems reluctant to explain their reason for selling the business, that’s suspicious and you should follow up on any issues. If you make any negative discoveries as a result, then you should make your concerns known to the seller or just walk away from the deal.
2. Can I Personally Add To This Business?
Knowing what to ask when buying a business is crucial to closing a sale, but you should also be asking yourself important questions.
Ask yourself “am I uniquely qualified to add value to this business?”
At Acquira, we believe in Energizing Lives so you need to ask yourself if you’re the right steward for that particular company. Are you willing to do what’s necessary to improve the lives of its workers? Are you willing to put in the work to grow the company? If not, you may not be the right buyer for this company.
3. How Has The Company Been Valued In The Past?
Business valuations can be done in many different ways. According to ExitAdvisor, the chief four methods are:
- Profit Multiplier
- Discounted Cash Flow Method
- Asset Valuation
As ExitAdvisor explains, “In general, no fixed rules or formulas apply to value how much your business is worth. Its value will always be what you are willing to sell for and what the potential buyer is willing to pay.”
Whereas in real estate, property valuations can be made by looking at similar property types within a given market, there are no two businesses that are the same. That means comparable sales aren’t a viable option.
So, given that a company’s valuation is somewhat malleable, you should do your research. How has its valuation been determined in the past? Is the value that you’ve been given the current market value of the business?
The information you receive can be outweighed by extenuating factors like the management team, market trends, and customer loyalty. But at any rate, it’s good information to have.
4. How Is The Business’ Financial Health?
While the business valuation can go a long way toward helping you determine the overall health of a company, you also need to dig into how well it’s doing financially speaking.
Do some research on cash flow and other financial liabilities including outstanding debt like notes, accounts, interest, and sales payable.
At a minimum, the general consensus is that you need:
- The last two years’ worth of financial accounts (profits, losses, and balance sheets).
- Financials for the current year.
- Business Activity Statements from the last four quarters.
- The last income tax return.
- A listing of every asset that the sale would include.
Dig through the financial records in order to confirm their accuracy. For example, if you want to buy an online business, look at website traffic to see if they match the numbers provided.
5. What Assets Are Included In The Sale?
We’ve already mentioned assets, but you should know which assets are needed or not and which ones are included in the ticket price. After all, assets can make up a big part of a business’ value.
You should physically inspect each asset while you’re going through the sale process and make sure you record the valuation of each asset.
6. What Does The Competition Look Like?
Know the competition. That’s one of the first rules of business. Understanding who they and how they operate will dictate many of the decisions you make.
After all, the success of a business is contingent on many factors. Knowing how it operates isn’t enough, you have to know what you’re up against. That way, you can begin to prepare yourself.
Do research on other businesses in the area and potential online competition. Every business has someone competing with it, so make sure you learn who’s competing with your acquisition target before you sign any documents.
Imagine going through the whole due diligence process for a chocolate company, only to find out that Bill Gates has invested in your top competitor. It’s better to know that sort of information ahead of time.
7. What Is The Future Of This Industry?
Imagine buying a telegram company a month before the telephone was introduced. Or investing in stage coaches just as the first Model T Fords were rolling off the assembly line.
It’s all well and good to know the financial health of your company, but if it’s part of a dying industry it’s likely not an attractive investment.
Do your research into the market. If there’s a new product about to be released that will make the service this company provides untenable, it’s worth knowing about before you make a purchase.
8. What Level of Working Capital Will You Need?
Working capital is also known as net working capital (NWC). Net operating working capital is a measure of a company’s liquidity.
It is the difference between a company’s current assets like cash, accounts receivable, and inventories of raw materials and finished goods, compared to its current liabilities like accounts payable.
Often, net working capital and net operating working capital are the same, with the number derived from taking Company Cash plus Accounts Receivable pus Inventories, minus accounts payable less accrued expenses.
So as the buyer, you need to know how much working capital will the business need in order to grow?
9. Do You Need Any Permits or Licenses To Run The Business?
Make sure to ask for a copy of all relevant permits and licenses. For example, liquor license for restaurants or safety accreditation for home services business.
Speak directly to the local regulating bodies to make sure the permits are in good standing and that there will be no issues in transferring them upon the sale of the company.
10. Has There Been A High Turnover In Staff?
A high turnover in staff may indicate unhappy workers. It can also indicate that there is a problem with the management team.
This may mean that you need to offer new employee incentives to keep talented people on board.
11. How Is The Relationship Between The Company and Its Customers?
Companies work hard to build their reputations. If a company is not held in high standing by its current customers, that’s a big red flag.
It could lead to difficulty growing the company, making it hard to grow profits.
These issues can be rectified with programs like loyalty programs, but it’s up to you to decide whether the investment is worth the time and money it will take to turn around people’s perception of the business.
On the other hand, a company with a positive reputation must be doing something right.
12. How Good Is The Management Team?
This will depend on the size of the company, but if the business is big enough it likely means you’ll have a management team that you’ll have to work with.
Look into how capable the team is and if their managing style matches your own. The management team are the people who will help you grow the business, develop talent within the company, and implement your vision.
You need to ensure that they are capable and a good match for you.
13. Have You Enlisted a Business Broker?
A business broker will list businesses for sale. They’re an excellent tool for finding businesses if you’re interested in beginning an entrepreneurial journey of your own.
Of course, the nature of their business is transactional. They receive payment through commission the sale. This can lead to some questionable motives.
At Acquira, part of our in-depth training is learning how to filter through good and bad business brokers on the way to buying your own business. You can learn more about that in our Acceleration Gauntlet.
14. Do You Have a Financial Plan For The Business?
Acquiring a business isn’t just about handing over money and watching it run itself, you need to ensure that you have a strong financial plan that will help the company grow.
The financial plan should include a review of the financial reports so that you have a clear picture of income and profit loss. This will allow you a clear overview of the company’s financial situation and its future potential.
The financial plan will be used as a key reference document both during the purchasing process and in the day-to-day operations that follow.
15. What Is The Handover Period?
Anyone selling a business has certain legal obligations they need to carry out as part of the process. These obligations require adequate planning of the handover process, which usually takes a period of time – often as much as six months.
This period of time, though, is agreed upon by the buyer and seller and should serve them both.
The handover process can include: the introduction of employees, training of management, introduction to clients and suppliers, and the notification to any banks, insurers, or utility suppliers.
Buying a business isn’t an easy task nor should it be.
Any buyer worth their salt will do extensive research and investigate every facet of the company that they can.
Only by learning as much about the business as possible can the buyer know that they’re making the right decision. Buying a business should never be a matter of gambling. It’s a thoughtful, rigorous process that demands time and attention, and knowing the right financial questions to ask when buying a business will make all the difference.
Remember, asking the right questions is as much about disqualifying bad deals as it is about finding good ones. The process helps you analyze a business in order to determine whether or not you can improve it, whether it’s a good fit for you personally, and whether it’s a good use of your money.
Acquira has built a robust training system that helps new entrepreneurs know what to look for when buying a business. If you’re interested in acquiring your own company, please schedule a call with us today.