Even if you’ve been a business owner for decades, acquiring a new business can present new, unique challenges. In order to make the right decision for you, your current employees, and your existing company, it’s important to do some research and really get to know the business that you want to buy. Asking the right questions upfront can give you a better idea of the business, its finances, and any red flags that you should know about.
Here are some of the most important questions to ask before a business acquisition to prevent major headaches down the road.
Questions to Ask Yourself Before Buying a Business
Before you go asking the seller questions about their business, it’s important to answer some questions for yourself.
1. How will purchasing a new business impact my existing business?
As a current business owner, you should first consider how purchasing another business might impact your existing one. Will you have enough time to devote to both? Do you have a team that can handle the operations of your existing business while you get the new purchase squared away? Will you merge the new business with your existing one? These are all things to be thinking about.
2. How will I pay for this new business?
Do you have enough money to purchase a business in cash or will you need to obtain financing? If you don’t have the cash on hand, your next question should be:
3. What type of financing do I need?
It’s worth exploring your financing options before you start making offers on businesses. A loan will allow you to purchase an existing business without having to bear the burden all at once. Get familiar with your local commercial lenders and learn about the different loan products, including:
- Business acquisition loans
- Commercial real estate loans
- Business lines of credit
- Term loans
- Small Business Administration (SBA) loans
A commercial lender will be able to help you understand what you qualify for and what you need (such as proper documentation and down payment) to get approved.
Questions to Ask When Buying a Business
Once you have the basics figured out on your end, you can start thinking about the business you want to acquire.
1. What’s the history of the business?
You’ll want to start with a broad overview of the business. How long have they been around, how long has the current owner been with the company, and why are they looking to sell the company? These questions may help you determine if the company is a good fit for you.
2. How did you arrive at your asking price and is it negotiable?
It’s important to not only ask what the purchase price is but how they arrived at that number. Before selling, some owners will have their business appraised by a third party. Other times, business owners will use arbitrary factors to determine their asking price. If the price isn’t based on data, you may have increased bargaining power if the owner is willing to negotiate a sales price.
3. Can you provide financial statements and tax returns?
It’s important to have a solid idea of what the business’s current financial state is before purchasing. Ask to look at relevant information such as:
- Revenue statements
- Annual cash flow statements
- Balance sheets
- Tax returns
Looking over this information for years past and not just the most recent year can help you understand the growth (or decline) of the business and serve as a predictor of future trends. Financial documents not only give you an opportunity to see the earning potential of the business, but they can also be indicators of any shady business practices going on. If things don’t seem to add up in their financial statements or tax returns, it should be a red flag.
4. What assets and capital does the business have?
Inquire about how much working capital the business has and what assets are included in the sale. Assets may include real estate, equipment, furniture, supplies, inventory, vehicles, and more.
5. What does the brand presence look like?
Though you may be able to determine some of this information with your own research, it certainly doesn’t hurt to ask questions about the brand’s position in the industry. Helpful questions to answer include:
- Does the name have brand recognition?
- What market share does the company have?
- What advantages does the brand have over other names in the industry?
- Who is your audience?
- Who are your competitors?
You’ll want to know who, exactly, this brand speaks to, how they perform in their niche, and if you’ll have to worry about competitors offering similar products or services.
6. Will the current management structure and team remain in place?
You should be thinking ahead to what the company would look like should you decide to make the purchase. In some acquisitions, the existing management structure and team remain in place through the exchange of hands. The existing owner may have a pulse on top managements’ plans to stay or leave the company.
7. Has the business been involved in any past, present, or potential lawsuits?
Legal troubles can be a huge hassle for owners of newly acquired businesses. If there currently are or ever have been lawsuits against the company, you need to know this.
8. What challenges has the business faced?
Knowing the challenges that the current owner has faced— past or present— can help you understand what you may be up against with this business. Remember that every company faces challenges, so don’t let them deter you. Take it as an opportunity to learn and prepare for what may be coming your way.
Get the Answers You Need
The goal of asking these questions is to get the information you need to make an informed decision. If you are unable to get answers to even basic questions, consider that a possible red flag. A business owner looking to sell their business without providing relevant information may be trying to hide financial or legal issues. But if all looks good and you do decide to buy, your lender will be able to guide you through the steps to apply for a business acquisition loan and make the deal happen!