5 Essential Questions To Ask When Buying A Business

Buying a business is a huge step for any prospective business owner that carries lasting change, regardless of whether your motive is financial independence, changing careers or simply investing your money. Yet, many who gain a new business this way without being prepared can find a slew of issues stopping ideal function, such as hidden financial issues or unclear ownership of assets. This is why you should always minimise unexpected consequences through some well-placed, honest questions that can sufficiently pull back the curtain.

But what are these questions? In this article, Real Business will outline the best ones to ask, how to interpret the answers, and how to gauge the level of unknown risks that may get in the way of business success.

Questions To Ask When Buying A Business

The following list are questions to ask a business owner who is pitching their business to you for sale. Buying a business is more involved than most purchasable assets, and it will be an active conversation that will change based on the information you receive.

Just remember why you’re asking the questions – to affirm the value of the business, and uncover any hidden factors that may compromise viability. Aside from that, the value of the business relies partially on your goals for the business itself. For example, keeping the employees of the already existing business may not be high in the priority list, as you may have employees of your own to bring with you.

Either way, the following are the five most important questions to ask when buying a business.

Why are you selling the business?

Probably the most obvious question, but ironically also the weakest. If their existing business is profitable and healthy, why would he want to sell? Truth is, there are a lot of valid answers that are otherwise impeachable. Some valid answers can be as simple as “I have found better use for my money elsewhere”, with the “elsewhere” part being a private matter.

The reason you choose this as your first question to ask when buying a business despite this is because to check for signs of early duplicity. It’s entirely possible that the seller could be honest, and they outright tell you that the business is suffering for any number of reasons (declining customers etc). This isn’t likely though, as they know that this answer may turn off the one looking at buying a business, or prompt them to lower the price.

More likely red flag answers are:

• Avoidance – Any diversion or answering of an irrelevant question is a key indicator of deception.
• Business-related – If the reason is vague, but clearly a business reason rather than a personal reason, then there’s clearly something about the business they are running from.
• Urgency – Less of an answer, more of a vibe.

The valid answers are as follows:

• Anything personal – If they need the large amount of money for personal reasons, there’s not many ways to follow up without prying too deeply.
• Retirement – If they are more senior and are retiring, then of course they’re selling.
• Lack of skill – If they got into the business and no longer have the capacity, or misjudged the requirements, to run it, then this doesn’t necessarily reflect badly on the business itself.

What assets, rights and obligations are transferred with the sale?

This question is an important part of the diligence process, as it outlines exactly what you’ll be getting out of the deal, thereby avoiding unexpected costs or disruptions, and that you’ll be paying money in line with the asking price. Of course, this also requires you to do your homework on understanding what is worth what. Having a financial advisor at hand works well with this.

Aside from obvious perks, like knowing what assets you’ll gain, you should also highlight whether the multiple supplier agreements, licenses, contracts, etc., will remain after ownership changes, and legal obligations will fall to you.

Legitimate answers include:

• Documentation — Hardline documentation is expected to be provided to a degree, but to ensure you are informed about what you’re actually getting and its worth, take a look at the following.
  • Purchase agreement—A purchase agreement can be anything from an itemised schedule of assets, contracts, IPs, and liabilities to vague assertions that don’t mean anything. Look for the level of detail provided. For example, if the agreement states, “The Seller agrees to transfer all necessary business assets to the Buyer,” then that is too vague. “Necessary” could mean radically different things to different people.
  • Itemised asset list – Your itemised asset list verifies the various physical and tangible company assets you can expect to receive (such as machinery, inventory, vehicles, tools, software). Have a mind for how much the assets work into the overall purchase price.
  • Contract and agreement transfers – This can ensure that key supplier contracts, leases and client agreements will all legally transfer to you.
  • Intellectual property (IP) transfer documents – This confirms that the legal ownership of trademarks, patents, copyrights and domain names are transferred.
  • Debt and liability disclosure statement – This identifies outstanding debts, lawsuits, unpaid supplier invoices or tax obligations that you would otherwise be responsible for post-sale.

Answers that should alarm you are:

• Vaguery – Vague assertions on asset forfeiture etc.
• Exclusion of value – If you note that enough valuable or essential business assets, rights and obligations are missing from the sale to detract from the worth, then this may be the catch you’re looking for. Ask them how they came up with the asking price if, from what you’re seeing, business valuation is less.

When deciding questions to ask when buying a business, this may seem like the most important one. Compare what you’re getting alongside the asking price for similar businesses recently sold.

What are the financials for the past three to five years?

This is one of the best questions to ask when buying a business, because it highlights the ups and downs of business’ profitability, the trends in growth and the stability of its finances. Whilst consistent revenue and profit growth highlights a stable and potentially profitable business, you should question fluctuations, especially if they are frequent.

Strong responses include:

• Financial records – It’s fair to expect the current owner to want to show potential buyers financial statements, such as detailed income statements, balance sheets and cash flow statements, then you have an honest foundation to launch from.
• Walkthrough – If the current owner is willing and able to explain any financial questions, such as fluctuations in expense and revenue, consider what they have to say.

Responses that red flag:

• Missing documentation – If they do not have documentation at hand, you should be somewhat concerned. It’s entirely possible that small business owners may not have that level of complex paperwork at hand, but that doesn’t change the fact that without the financial statements, you can’t get a proper picture of the financial health of the company. We recommend asking them to get access to them, and send them before you make the decision.
• Refusal – If they refuse to show you financial data, ask why. If confidentiality is their concern, offer to sign an NDA (non-disclosure agreement). Otherwise, seek alternate ways to validate revenue and expenditure, such as tax returns, supplier invoices or bank statements. If all else fails, then it’s hard to consider them as an honest business owner.
• Delayed exposure – If the seller promises to send the required financial statements, but continuously fails to provide it, then it’s likely they have something to hide.

Overall, the effectiveness of this question majorly depends on your knowledge of industry benchmarks etc. If the company’s finances are poor and can be explained, it’s up to you whether or not you believe you can do a better job than the current owner.

Is the seller willing to set up a non-competition agreement?

Even if you have no intention of actually signing one, asking if the current owner is willing to set up a non-competition agreement can be used to infer, from the answer, whether or not they may be setting up a new business that could potentially compete with yours.

The reason this is a problem is simple – they may take their staff, meaning you lose existing key employee expertise and potential loss of company culture, and possibly even clients. Consumer clients have customer loyalty towards a brand, whereas B2B clients have loyalty towards the people they’re corresponding with. This is one of the more clever questions to ask when buying a business, as it successfully secures your immediate day-to-day operations upon transfer, but make sure you save it for later in the conversation.

The following answers are good indicators:

• Agreement – Willingness to sign demonstrates they’re leaving the industry, securing your newly acquired business from sabotage.
• Reasonable adjustments – If they plan a business venture that does conflict with a non-competition agreement, then you should explore options.

Some red flags could be:

• Refusal – Refusal to sign a non-competition agreement should prompt you to explore the reasons why. A common copout is a supposed need for “flexibility”. You should be firm about your concerns, and that verbal assurances simply are not enough.
• Changes in plans – If the existing business owner, in response to this question, gives new future plans, that’s a sign of deception.
• No need – If they insist that there’s no need to sign the agreement because of their actions, remind them that you want it signed because of your own concerns. If that’s not enough for them, then consider the business acquisition a bad idea.

The previous owner of the acquired business should want to ensure the new owner’s fears are assuaged. At the end of the day, it’s not illegal to lie about your future plans during the business purchasing process, and these agreements are in place precisely for that reason.

What are the biggest challenges facing the business?

Having the existing business owner explain to you the biggest challenges facing the business can potentially reveal unique risks that you’d otherwise not be able to uncover. First and foremost, it’s important to understand that this should be a later question to ask when buying a business, once you’ve already gathered information.

There’s a lot to unpack with this question, as its effectiveness entirely depends on how well you can pin down the existing business owner using answers that have already been given. Their response can either be evasive, to which you chase, or they can reveal more concrete details about specific problems. Either way, you are a more informed buyer.

Legitimate answers consist of:

• Data-backed assertions – With what you have of the business’s history and financial analysis, you should be able to cross reference anything they tell you and find commonality.
• Real industry challenges – If they tell you of challenges with competition, seasonal fluctuation, operational inefficiencies etc, these are normal challenges that all businesses have to face.

That being said, some bad answers are:

• Downplaying – If their answers suggest that there’s not all that much to worry about, but you can see that there has been some below-benchmark results and activity in business operations, you should challenge them.
• Contradiction – If what they’re saying doesn’t add up with the data you’ve seen so far, ask about the discrepancy.
• Unresolved anomalies – If there are anomalies present in the data that the business owner is failing to explain, then it’s fair to assume that there’s likely some hidden issue that isn’t going to rear its head until you’ve already made the purchase.

Conclusion

In the end, buying a business is fairly complex, and having an eye for detail makes all the difference in negotiations. So long as you do your homework on the industry and worth of the assets, and you follow up these essential questions with ones designed to lower overall risk, you can learn a lot from your business purchasing journey.