If you’ve had a lifelong dream of buying a business, you’ll need to do your homework.
And, the best way of doing your homework is by asking—both the owner and yourself—some really penetrating, hard-hitting questions.
Don’t let either the owner or yourself off the hook. You’re buying a business that’s going to be both a significant investment of time and money.
So, asking the right questions will help you to get a business for a fair price, prepare you for the difficulties of ownership, and ensure your long-term success.
To help you buy your next business, we have compiled 44 questions to ask when buying a business.
Personal Questions for Yourself
1. Why buy the business?
What is the goal of the acquisition? Is my purpose to acquire specific technology or enter into a new market?
2. Why not build internally?
Why buy the product or service instead of building it from scratch? Will it be more expensive to build from scratch? This analysis is crucial when deciding to buy a company, which requires collaborating with the CEO and functional heads.
3. Is the acquisition affordable?
Funding an acquisition can be tricky, depending on your financial capability. There are three ways to fund a transaction: equity financing, debt financing, and cash reserves:
- The simplest is cash reserves, paying the entire deal with excess money in the balance sheet.
- Equity financing is the act of raising money by exchanging equity. This method is risky, as losing too much equity might affect ownership.
- Debt financing is raising money from lenders, and repaying them later, typically with interest. Debt financing is harder to obtain and will depend on the consolidated debt capacity of the company.
4. Where to find third-party consultants?
Aside from the internal team, getting outside help has its benefits, and is sometimes necessary. It’s important to understand where to find third-party consultants and the costs associated with hiring them.
5. Is there a culture fit?
It’s never too early to do a cultural assessment of the target company. Even at a high-level view, massive differences will be noticeable. For instance, a traditional company trying to acquire a millennial-dominated startup might have problems due to a substantial generational gap. Further diligence is required.
Personal Questions for the Owner
6. Why sell the business?
There are several reasons why business owners sell their companies, and some of them can be deal-killers. Knowing why a business is being sold upfront can give you confidence or the ability to walk away as soon as possible.
7. When did the business start?
Longevity is a good indicator of business success. The longer the business has existed, the safer it is to purchase. Chances are, they have good customer loyalty, a solid reputation, and overall stability. However, startups are often less expensive and have more potential. Business duration is a good starting indicator of the business’s quality.
8. Are there any other investors or owners?
Is the seller the 100% owner of the business? Or do they have capital investors? Are they selling their shares too? How much of the company is for sale?
9. Was there ever a lawsuit against the business or the owner?
In the business world, past or present litigation matters. It’s a good indicator of culture, values, and, most importantly, reputation. Also, litigation can open you up for liabilities. If the target company has legal problems, you will inherit those problems as the new owner.
Future Business Growth Capabilities
10. Does the business have the potential for hypergrowth?
Find out the owner’s vision regarding their business. Because no one knows the company more than the owner does. If they are one step away from achieving hypergrowth, they might know what to do, but just lack the capabilities or funding to achieve it.
11. Is the business too dependent on the current owner?
A business heavily dependent on the owner could cause problems, especially if they are retiring. That massively cuts the value of the company, even though the owner may not see it that way. Also, putting all hopes on one person who could walk away on time is not a good idea. If it seems impossible to replicate the owner’s role or automate the processes, think twice about buying the business.
12. Is there someone who could run the business?
If the business is not dependent on the current owner, find a suitable replacement that can handle the business and its day-to-day operations. The location of the business is also crucial. If the business is outside your country or city, and there are no willing employees to move there, that could be a problem.
Financial Questions & Valuation
13. What is the business revenue?
How much money is generated from regular business operations? If most of the money comes from non-operating income, that means their products/services are not sellable, and acquiring this business might be a problem. This question entails getting all of the financial statements for the past five years.
14. How much profit does the business make a year?
Profit is not the same as revenue, and a business can have high revenue with no profit due to high fixed costs. It’s essential to understand how profitable the business is.
15. Does the seller have any outstanding debt?
Look at the debt schedule. As the one inheriting the debt, it is important to understand each and every detail of the debts incurred by the company.
16. What are the company’s assets?
Ask for a list of all the long-term assets owned or leased by the business. For the assets owned, they should provide dates of purchase to give an idea of the length and estimated usage of each machinery. It will also help understand the depreciation, condition, and remaining value of the assets. For leased property, ask for the contracts whether it’s machinery or real estate.
17. How much is in the business’s bank account?
A bank account balance will give a good estimation of the business’ operating cost. There is also the matter of business continuity. Since all the salaries, receivables, and payables go through that bank account, inheriting it is easier. Just put the account balance on top of the overall purchase price so that the transaction doesn’t disrupt the business operation.
18. Is the business tax-compliant?
If the business is not tax compliant, you will inherit potential problems with the government.
19. What does the business’s quality of earnings look like?
A quality of earnings report is a good indicator of a company’s profitability under new ownership.
20. What are the projected sales for the next year?
Look at the trajectory of the business. Does the business have something in the works that is geared toward boosting sales? Do they have new opportunities? Do they have incoming new clients? Getting their rough estimate is an important part of evaluating their business.
Read Also: 44 Questions to Ask When Buying a Business
21. What is the seller’s asking price?
How much is the asking price? If it is unreasonable, consider walking away before wasting any more time. It’s very common for entrepreneurs to be emotionally attached to their business, which skyrockets their expectations. If it’s too low, consider sealing the deal quickly before any buyer swoops in and triggers an auction.
22. How much have similar businesses recently sold for?
Regardless of the number and what the business looks like, it’s important to know the fair market value for the specific type of business. Research or ask around how much similar businesses have recently sold to get an idea of how much to pay.
Questions on Day-to-Day Operations & Management
23. How many employees does the business have?
Get the business’s organization chart and headcount by function. This will provide insight into the critical players involved in day-to-day operations and the overall size of the business. This question also entails getting employment contracts. Gain access to sensitive information such as compensation, bonuses, and other details regarding every employee.
24. Have there been any layoffs in the last 24 months?
Like it or not, culture matters. If the company is throwing out employees frequently, that says a lot about its culture and how it treats or retains employees. So, try to uncover if there are employees who left out of anger or were mistreated, which could lead to possible lawsuits in the near future.
25. What are the products or services of the business?
Get a list of the products sold, or services provided, with a description. Knowing everything about these products will help during integration, especially in creating a go-to-market strategy.
26. Does the business have intellectual property, trademarks, or patents on its products?
Are their products special? If so, are they protected or registered? If they have no protection on a special product, then it is virtually useless because another company can copy it easily. Is it too late to register now? If their product is the deal rationale for acquiring the company, then this could be a deal breaker.
27. How does the business produce products?
This question provides a detailed view of what the day-to-day operations look like. How do they acquire their product? Do they make it from scratch? Do they buy parts and assemble it themselves? Or do they just buy and sell the products? Knowing the workflow will help accurately identify key people to retain, the pieces of equipment and tools needed for daily operations, and cost synergies.
28. Are the facilities, equipment, and vehicles in good working condition?
If the sales are great and the products are great, but you cannot produce anything because the equipment is broken, then it’s all for nothing. If all the vehicles needed to sell or deliver the product don’t work, how will the business operate? Replacing or repairing everything will cost a lot of money and should be deducted from the overall valuation.
29. How does the business sell?
One of the most critical questions to ask before acquiring a company is how the business sells its products or services. Where do they sell? How do they deliver? How do they collect payment? Achieving revenue synergies is almost impossible without understanding the quote-to-cash process.
30. Who are the customers?
Who are the top clients? Do they have contracts or can they leave anytime? How many customers do they have? And most importantly, who are the typical buyers of the product?
31. How does the business acquire new customers?
What is the go-to-market strategy? How do they acquire new customers? Do they have proactive sales reps? Physical stores? Social media? And what does the customer acquisition cost? Understanding the prospect-to-customer process is key to integration.
32. Has there been customer churn in the last two years?
How many customers has the business lost? Do they know why? Is it something serious? Or is it because of better competition?
33. Who are the competitors of the business?
Knowing the competitors will help paint the entire landscape of the industry. Understand who they are, what they are doing, and what you can do to outgrow them.
34. Does the business have the proper licenses and permits to operate?
Secure necessary permits to operate the business, licenses to use special machinery, and any other government-mandated licenses. Does the business have all of the necessary permits and licenses? If they do, are they all transferable to the new owner? If not, is it possible to secure one? Otherwise, it might not be possible to own the business after all.
35. What kind of technology does the business use?
Technology is crucial for any business. It’s very safe to say that the target business uses technology tools. What are the tools used? Can the tools be migrated to another system? Is it necessary to upgrade their computer hardware to be at par? This information directly impacts the integration budget.
36. Will the business be the same under different ownership?
What will the company look like after the sale? Can it still continue to run properly? If a huge part of the business relies on the owner’s name or personality, then it’s going to be impossible to replicate.
37. Is the business better left alone? Or integrated?
Integration is the most delicate part of the transaction. Properly assess how much integration is possible to achieve synergies without breaking the company’s value.
38. Is the seller happy about the integration plans?
A big mistake that buyers make is not listening to what the seller has to say about the integration plan. Remember that the seller is good at what they do. Be open to suggestions and align with their business leaders on what the company should look like after the transaction.
39. Are you currently paying yourself?
If the owner isn’t getting paid, this is a red flag. You want the business to generate enough profits that you can draw a salary.
40. How quickly does the business get paid for its products/services?
If there’s a time delay between the delivery of merchandise and payment, there might be a supply chain problem. You might want to take a closer look at that before you agree to buy the business.
41. Can you stay on for a short time to ensure a smooth transition?
No matter how much you know about what you’ll be buying, there’s probably going to be at least a bit of a learning curve. That’s why it would be great if the owner could stay on for 3-6 months to help you learn the ropes.
42. Do you have any tips for me on how to make the business as successful as possible?
This question will help the owner formulate in his mind precisely what he’s done over the years to make his business successful. This might result in valuable information you can replicate so that you’re successful too.
43. How will the deal be announced?
Announcing the deal can make or break the transaction. A poor announcement can scare all the employees and cause them to leave. The same can be said for newly acquired customers. Plan with the communication team carefully and get support from the leadership.
44. Are you happy with the company?
Are you happy with the transaction? At the end of the day, the buyer has to be confident and satisfied with the purchase.
Conclusion
Buying a business requires time, effort, and money. An acquisition can transform and grow a business overnight.
But buying the wrong company is a waste of time, and resources, and causes distractions. So you must analyze, investigate, and perform due diligence to ensure that doesn’t happen.
The entire process of buying a business can be daunting. However, with the proper research and attention to detail can lead the business to successful growth.
So, sit down before you buy and make up your list. You don’t have to limit yourself to the questions in this article. Use them to spark your own!
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