Jonathan Jay explaining questions you should ask before buying a business

What To Ask When Buying A Business? The Most Important Questions

A lot of time, effort and money goes into every business acquisition. Whether you are looking at buying startups or an established existing business, you need to examine financial records, undertake a due diligence process, check out the legal issues and shine a light into every corner of your potential new business venture. It’s vital that the right questions are asked, regarding the company, the people, the marketplace and more. Here are our most important questions to ask when you are buying a business.

Business Readiness

1. Why purchase this business?

Before you put too much into a business acquisition, make sure you are clear as to what you hope to get out of it – and that the odds of success are in your favour. Take a big-picture view of both your aspirations and the potential of the small business. Do they match up? Will this business help you to achieve your goals?

2. Can the acquisition fit the budget?

Your budget will depend on how much you can invest and/or how much you can raise. Yes, you can use your own money to make a business purchase, but there are other ways of doing it. For example, if the business is cash-rich, it could effectively pay for itself. (Remember, the money in the bank account belongs to the business, not the seller.) You could work with a partner or investor and share ownership. If it has assets, you could borrow against their worth.

3. Is this the optimal target company currently available?

Be aware of what is available and identify the best target for you. Just because you are talking with one owner doesn’t mean you can’t look at another company – keep your options fluid until you are set on the best purchase.

Business History

4. Why does the owner want to sell the business?

People sell businesses for all sorts of reasons. Make sure the one you are interested in isn’t being sold to get rid of a problem – or if it is, that it’s a problem you know how to deal with and will profit from solving.

5. Are there additional investors or proprietors?

Get clarity on the ownership of the company. Does the seller own all of it, or are there other investors? How much of the company would you be buying, and how might your business plans as the new owner be affected if it is less than 100%?

6. Has the business faced any legal disputes?

If so, you might find the reputation of the business has been damaged, which will have a knock-on effect when it comes to revenue and growth. It might also leave the business open to related liabilities. There are ways to mitigate these things, but be aware that those problems come with the business so they will become yours to deal with. They might also be indicative of staff abilities and attitudes, and wider company culture.

Future Growth

7. Is the business overly reliant on the current owner?

The best kind of company to buy is one that runs perfectly without the current owner. If the owner is an integral element of the success of the business then as soon as they leave, the value drops. As the new owner, you might lose staff and customers whose loyalty was to the previous owner. You might lose favourable terms from suppliers. View such dependencies as red flags.

8. Is there a viable candidate to manage the business?

You will need someone who can handle day-to-day business operations and manage the business for you. Perhaps there is a member of staff who can step up, or perhaps you will have to bring someone new in to fill that role.

9. Does the business have hypergrowth potential?

Hypergrowth means the business achieves an annual growth rate of 40% or more. There are various ways to do this; assess whether your target business shows that potential. Perhaps some much-needed investment or a fresh approach will generate business success.

Financial & Business Valuation

10. What is the company’s financial standing?

Seek to get a good understanding of the company’s financial health. Examine financial statements including balance sheets, cash flow statements and tax returns. Have a look at the bank statements, not only to see what the current bank balance is, but also how cash flows in and out. Questions to ask include, what is the company income? What is the annual profit margin? Is there enough working capital? Are there outstanding debts? What does the debtor book look like? What are the sales projections for the next year? Is the business compliant with tax regulations? As the potential buyer of the business, all the necessary information should be made available to you.

11. What assets does the company hold?

Look for tangible assets – items on the balance sheet, things that have serial numbers, property – that can be leveraged for finance. Check whether the business possesses any intellectual property rights, copyrights, patents or trademarks, which can also be hugely valuable. Investigate intangible assets such as goodwill. These things feed into business valuation and also potentially help with funding the purchase.

12. What is the price requested by the seller?

What is the selling price the business owner is looking for? Aim to get them to tell you what they need, rather than you making an offer. Due diligence will help firm up a valuation, and it’s also a good idea to find out what similar businesses have recently sold for when deciding on the purchase price.

Day-to-Day Operations

13. How many employees does the business employ?

If you buy the business, you also take on the staff, so make sure you understand the size of that commitment and the legal obligations that go with it. Identify the key employees. Also, find out if there have been any recent workforce changes. If a number of people have left or been made redundant, find out why. This could give you an insight into company culture – and perhaps the current state of staff morale.

14. What are the business’s products or services?

Make sure you fully understand what the business provides to its customers, and how. Learn the dependencies in the supply chain, and how things get to market. Get to know essential staff and primary suppliers.

15. What strategies does the business employ to gain new customers?

As well as understanding how – whether that be via salespeople, bricks-and-mortar premises, websites or something else – get to know the costs involved in boosting the size of the customer base. Seek to identify key customers and how they pay. Are they on contract? Do they pay a set amount monthly? How easy is it for them to walk away? Has there been recent customer churn, and if so, why?

16. Who are the main competitors?

Who are they, what do they charge, how do they operate? Getting a good understanding of the competition will not only provide insights into the marketplace but also highlight areas of potential competitive advantage.

17. Who or what else is involved in day-to-day operations?

For example, are there any joint ventures or current partnerships in place, and how do they impact the business? Are there any additional existing contracts, agreements, or obligations? Does the business have the necessary licences and permits for things like activities and machinery, and are they easily transferable?

Purchase Contract

18. What risks accompany the transaction?

All acquisitions will involve an amount of risk; the business sale and purchase agreement is one way in which those risks can be managed. Look at integrating appropriate warranties and indemnities.

19. What elements constitute the transaction?

Be clear and specific about what it is you are buying. You might also include here any involvement the seller will have, and for how long. Consider including non-compete and non-solicitation clauses, and NDAs.

20. What additional items are needed for the transaction closure?

For example, is the landlord prepared to transfer the lease? Is funding in place? Have necessary permissions been sought from, for example, government or HMRC, for the purchase and any property transfers?

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Additional questions

21. How does it all look?

Before you ink the deal, take a moment for review. Are you happy with the company you are buying and the way in which you are buying it? Are the deal team satisfied with the transaction? And finally, and this is especially important if they will still be involved with the business, how was the seller’s conduct throughout? This is your last chance to seek to change things, or even to walk away, so make sure you are happy with everything.

22. Is the target company socially conscious?

ESG comprises environmental, social, and governance issues. They look at how an organisation impacts the planet and the people they have contact with, and whether it operates transparently. These are becoming increasingly important and it might be necessary or prudent to seek alignment. Are there things that are already congruent, or would you be starting from scratch?

23. What is the announcement plan for the deal?

Make sure staff know first, and consider how they will be told, especially if it’s a multi-site operation. For the wider world, you might want to make a big splash, a smaller announcement in the trade or local press, or announce it on social media and/or LinkedIn. You might even keep things low-key until you have made any necessary changes, including perhaps a change of name to leave behind unfavourable opinions. Have a plan in place.

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