Essential Questions to Ask When Buying a Business

Purchasing a business is a significant decision - arguably up there with buying a house.

To ensure you make a smart investment and avoid costly mistakes, it’s crucial to ask the right questions. Thorough research will provide the information needed to make an informed decision, helping you determine if the deal is the right fit.

When buying a business, you’re not only acquiring the operations but also the financial health, reputation, and workforce and more. This means that conducting in-depth research, or due diligence, is vital. The right questions will help you spot red flags, understand the company’s situation, and assess the future potential of the business. Here's a list of key questions to guide you through the process.

Why Asking the Right Questions Matters

Buying a business means inheriting not only its operations but also its financial position, reputation, and team. Due diligence is a critical step to ensure that you’re aware of any issues before moving forward. By asking the right questions, you can evaluate the business’s current health, uncover potential challenges, and get a clearer picture of its future growth prospects.

Key Areas to Consider When Buying a Business

To make sure you’ve covered all your bases, here are some important questions to ask before committing to a business purchase. These questions form part of your Due Diligence:

1. Assessing the Current State of the Business

Before diving in, ask questions that will help you evaluate whether the acquisition makes strategic and financial sense:

Why do I want to buy this business?
What’s my goal? Are you looking to enter a new market, expand your current operations, or start your business journey?
Is the business affordable? Consider how you’ll finance it - through equity, debt, or cash reserves or a combination.
How will I manage the process? The process of buying a business can be complex, make sure you have the necessary resources and expertise/advisers to help you.

2. Understanding the Business’s History

It’s important to know what you’re stepping into by asking about the business’s background:

Why is the business for sale? Understanding the seller’s motivation will help you gauge whether there are underlying problems or a genuine seller.
How long has the business been around? Longevity often indicates stability and customer loyalty.
Who owns the business? Are there other owners involved? It is is important to understand if it is owned by a family that they are all paid market salaries to ensure it doesn't inflate the profitability. If there multiple owners what are there roles?
Has the business been involved in any lawsuits? Litigation history can reveal potential risks or unresolved issues.

3. Evaluating Future Growth Potential

No one wants to buy a business that has reached the maximum level possible, leaving no opportunity for growth for a new owner.

As the potential next owner what can you do to grow?

Does the business have growth potential? Ask the owner what their vision for future growth and what new opportunities exist.
Is the business dependent on the current owner? A business heavily reliant on one person can provide some risk, how do plan to transistion the old owner out and you take over.
Can someone else step in to run the business? Understand whether the business has strong leadership in place or if you’ll need to step in personally.

4. Understanding Daily Operations

Even if the financials and growth potential check out, you need to understand the daily operations:

How many employees does the business have? Review the team’s structure to identify any key roles and responsibilities.
What products or services does the business offer? Gain a clear understanding of the business’s offerings and which ones are most profitable.
Is there any intellectual property (IP), patents, or trademarks? IPs can be valuable assets, so make sure you know what the business owns.

5. Financial Health and Valuation

Getting a clear picture of the financials is essential before making any decisions:

What are the business’s revenue and profit levels? Review the last few years of tax returns and financial records to check for consistency in profits.
What assets does the business have? Take stock of equipment, intellectual property, and real estate owned or leased by the business.
Is the business tax-compliant? Look into recent tax returns to ensure there are no unpaid liabilities, check GST returns. Ensure you have an accountant to support you in this process.
What’s the asking price, and is it fair? Research similar businesses to ensure the asking price aligns with market values.

General Questions to Guide Your Due Diligence

Here are some additional questions to help you as you gather information about the business:

What financial documents should I review? At a minimum, review the last three years of financial statements, tax returns, and GST returns.
How important is the reason the business is being sold? This can reveal hidden issues. If the owner is retiring, the business may be stable, but if there are financial struggles, proceed with caution and ensure you get sound financial advice.
What’s a reasonable timeframe for due diligence? Due diligence typically will take around 15-20 working days, depending on the complexity of the business. Don’t rush through this process—thorough research is key.
What should I know about employee retention? Identify whether if key employees are likely to stay after the sale and what plans are in place to retain key staff.

By asking these key questions, you can make a well-informed decision when buying a business.

Remember, due diligence is a crucial part of the process, and it’s important not to rush. Take your time to gather as much information as possible to ensure that your investment is sound and that the business is a good fit for your long-term goals.

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