How to Buy a Business: 5 Questions You Need to Ask
Before buying a business, write down a list of questions to ask yourself and the seller. The answers will help you make a sound purchasing decision.
Key Takeaways
Ask several questions before buying a business to assess if it’s the right fit
Find out how profitable the business is, if you’ll enjoy running it, and more
Due diligence can help answer many of these questions and set you up to make a good choice
If you’re like most people, you’ll want to research how to buy a business before making your final decision. That’s because business acquisition can be exciting and frightening at the same time. Buying a business can be an effective way to start or continue your entrepreneurial journey, but it also means taking on significant risks.
When you buy a company, the business operations, processes, liabilities, customers, and finances become your responsibility. Without due diligence, it can be challenging to know what you’re getting into or how to protect your investment. You can tap into professional services to help you dig into a business’s finances and marketing position, but you’ll also want to ask yourself some pertinent questions.
These questions are crucial to ensure you make the right decision, so you’ll want to examine the business and your interest from every angle – and consider the pros and cons. Many deals appear great at face value, but deeper analysis may help you discover an aspect or two that makes the business an unattractive target. To help you figure out if a deal is right for you, here are some questions to ask before buying a business.
1. Will I enjoy running the business?
Before committing your money and resources to acquire a business, consider if you're well suited to handle it. Are you interested in learning more about the company and its products or services, and are you passionate about running it? These questions are essential in helping you evaluate if it’s a good match for you and your skillset.
You’ll also want to ask yourself if you’re prepared to manage the staff and other workers who help the company run. Can you handle those aspects on your own, or will you need a dedicated human resources or payroll manager? You’ll also want to find out how staff relations are currently and if there’s any work you’ll need to do to improve the team’s morale or efficiency.
There are a lot of moving parts in any business, so it’s worth asking yourself if the work you’ll need to put in to grow and sustain the company aligns with your passion and skills. If not, you may want to reconsider your decision to buy the business.
2. How will I pay for it?
Once you decide that a business is for you, the next question is to ensure you have the finances to pay for it. The starting point is to inquire about the asking price and how the seller arrived at the valuation. The answer to this determines whether you can afford the business and can set you up to assess if it's a good value.
One option for paying for the business is asking the seller if they’re willing to finance the transaction, where the seller’s financing might cover 10% to 25% of the cost of buying the business. If seller financing isn’t an option, ask yourself what other means of paying for the business you might have. You may want to buy it outright or seek other investors, for example.
Determining whether you can afford the company can help you decide whether to proceed with the transaction. Avoid overextending yourself, keeping in mind that in addition to the purchase money, you also need operating capital for the payroll, utilities, rent, marketing, inventory, and other expenses over the long term.
3. How profitable is the business?
Revenue and profits are two vital components to consider when buying a business. With the help of comprehensive due diligence, looking at how much the company earns in revenue annually, along with other financial factors, can give you a picture of its profitability. Closely review profit and loss statements to establish the profit margin. If the income is significant, but the profit margin is small, it could be because the overhead is too high, which may be a red flag.
The process of establishing the profitability of a business can be demanding. Working with a due diligence expert can help you verify the financials to confirm if what the seller says matches what's in the books before proceeding with the deal process.
4. What do the legal documents say?
You’ll also want to find out if the business has the necessary business permits and whether it meets licensing requirements, if applicable. Finding this out from the owner before committing may save you from legal trouble by ensuring you follow permit and licensing regulations.
Ask the seller for copies of any relevant legal documents, including leases, and verify there won't be any trouble transferring them once the purchase is complete. You can take this step further by talking to local regulatory agencies to ensure you have the correct information.
You will also want to find out if the business is facing any lawsuits, which could be a warning sign. Pending legal problems could swiftly deplete your financial resources, and it may take a long time to recover from a bad situation.
5. What is the business’ brand reputation?
The question of brand recognition is crucial in influencing your purchasing decision. It can give you insights into how well the target market is aware of the company. With a well-established positive reputation and existing successful marketing strategies, you may not have to work hard to spread the word about the business.
Brand positioning also matters as it helps establish the business's advantages over the competition. Ask the seller what worked and what didn't regarding the marketing strategy. This feedback will give you insights into marketing efforts that can help you pivot to potentially increase the return on your investment over time.
For many buyers, the business's reputation in the market is critical. Don't be afraid to talk to the business’s clients and other stakeholders in the industry. With the feedback from this sort of market audit, you’ll be in a better position to decide whether investing in the business is a good idea.
Conduct due diligence – and get help doing it right
Once you’ve found a company you’re interested in buying, the next step is to ask questions and research that business in depth. At Guardian Due Diligence, we can help you learn the truth about a business’s financial health and help you avoid making a costly investment mistake. Our team has evaluated over 1,500 business deals and can help you, too. Contact us to schedule a call or gain more insight into what you need to know before buying a business.