When you are confident of leaving the monthly pay cheque and want to do something of your own, then starting a business or rather if you have the capital, then buying a business is probably the best thing for you!
So this is a very courageous decision to make. Congratulations on taking the leap of faith. Although the stability of your income may not be quite the same, the reward of having a job you look forward to daily is priceless.
One of your first decisions is whether to set up a new business or buy an existing business. Although there is no right or wrong answer, you should carefully assess the merits of both and pick whether it suits your personal circumstances and expectations.
If you choose to purchase an existing business, you are effectively buying the cash flows from existing customers. Upon identifying a target business, it is important to perform a detailed due diligence review before placing an offer to purchase.
This review can save you from significant losses and provide you with some valuable information to help you operate the business more effectively. So in this article, we have thoughtfully made a list of questions to ask when buying a business.
Read on to know more!
Questions to Ask When Buying a Business
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.
The first thing you should ask is:
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.
Can You Add to the Business?
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.
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
- Comparables
- Discounted Cash Flow Method
- Asset Valuation
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.
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.
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.
Also Read: Is Friday a Business Day for Shipping?
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.
So these are the basic questions you need to ask before buying a business so that mistakes can be avoided at a later stage.
Thank you for reading this article and do add your thoughts below!
Next Read: Is Buying an E-Commerce Business Worth It?
