Buying a business is a lot like buying a house. You wouldn't buy a house without performing a home inspection, and to do that you'd hire a licensed home inspector. This professional home inspector knows what to look for; they have a trained eye and will make sure you're investing in the right house. Similarly, you wouldn't blindly purchase a business without first examining its foundation. It's important to know the ins and outs of a business before putting your name on it. Here are the five questions to ask before buying a business.
- "What are your biggest challenges right now?"
This question provides you, the buyer, with a roadmap for the business's future. It allows you to feel out potential risks and to better prepare for the job ahead of you. This question also informs you of potential costs or investments down the road. If the business is more of a fixer-upper than you initially wanted, you'll know to turn the other way.
- "How well documented are the procedures of the business?"
Before buying a business, you want to find out how well organized the potential business is. Is there an established workflow and are employees familiar with it? Frequently, small businesses operate without set procedures in place or without an outlined workflow. While this method might have worked well for the previous owner, you'll need some sort of direction upon takeover, and without manuals on company policies and practices, you'll be lost in the shuffle. You should be provided with a procedure manual that outlines the business processes and explains the business functions on a day-to-day basis, as well as on a larger scale. This manual should include contracts, relationships, internal systems, as well as product, pricing and distribution strategies.
- "Do you have any past, pending or potential lawsuits?"
You definitely don't want to inherit any lawsuits when you buy a business. Ask the current owner and his or her lawyers about any potential lawsuits or liens against the company, and be sure to investigate thoroughly. You don't want any debts, lawsuits or damage to your reputation before you even get your foot in the door. A well-trained, capable HR department and extensive training throughout the company can help avoid lawsuits from within the company.
- "How have you documented the financials of the business?"
Have an accountant pour over a business's financials before you sign any paper work. It's important to make sure there's a clear paper trail for the company's financial data. Verify everything. You'll need access to tax returns and other important financial documents to substantiate the current owner's statements about the company's revenue, other income sources and profits or losses.
- "How did you arrive at your asking price?"
This is an important question to ask before buying a business because, according to Jane Porter, "Sellers will often base their asking price on arbitrary factors such as how much money they'll need to move on with their life."Â When dealing with such arbitrary reasoning, you have to prove further to find out what solid quantitative information the seller has to back up the asking price. "If a seller arbitrarily arrived at his asking price, there's likely more room for negotiation."
Of course, there are numerous questions to get answered prior to and during due diligence. However, by addressing these most important questions early on, depending on a results, you may end up saving a lot of time and money later on in the buying process.
Jon Molayem, ACQUIVEST Financial Group