If you’re thinking of buying a business, it’s important to do your due diligence. Not only will a business cost a lot of money to buy, but it is also likely to cost you in time and stress as you work to make it successful under your management. As such, it’s important to ask the right questions before deciding to buy. These questions should cover the history of the business, its financial position, the legalities, marketing and the day-to-day operations.
Questions about Business History
It’s important to understand the history of the business. This information will help you understand the seller’s motivations and the business’ potential.
Make sure you ask:
- How long the business has been operating
- How long this vendor has owned the business
- Why they are selling
- When they decided to put the business up for sale
- Whether the business always run from this location
- What they would do differently if they were buying or starting the business now
- The sales history for the past few years.
Questions about Financials
Obviously, money is a key interest as you want the business to be profitable. Here are some important questions to ask.
- What is the annual gross revenue? What was the annual gross revenue for the last two years?
- What is the annual net profit? What was the annual net profit for the last two years?
- What were the tax returns for the last two years? (A mismatch between revenue reported to you and revenue reported to the tax office is a definite warning sign.)
- What is included in the purchase price?
- How did they arrive at the selling price?
- What does the current owner take for a wage?
- Is the business growing or declining? If the business is declining, how can that be turned around?
- What are the current debts?
- Are there outstanding accounts due?
Questions about Legal Matters
Purchasing a business can come with a number of legal entanglements. Ask the following questions to get an understanding of the legal situation of the business.
- What are the lease terms on any property?
- Are there any pending, past or potential lawsuits? If yes, what are the details? What were the outcomes of past lawsuits?
- What are the business’ current contracts?
- Are there any licensing requirements for running the business?
- Are there zoning or industry regulations that affect the business? Are there any upcoming changes that may affect the business?
- Will they sign a non-compete clause? Will their employees sign a non-compete clause if they choose to leave?
Questions about Market and Marketing
The customers the business is hoping to reach and how to reach them are integral to business success. These questions will help clarify the market and marketing of the business.
- What is the target market?
- Is the target market growing or shrinking?
- Who are the primary competitors?
- What is the market share of the business? What is the market share of the competitors?
- What channels does the business use to reach customers? Which channels are most successful?
Questions about Day-to-Day Operation
Finally, it’s important to recognise how the business runs in normal operation to understand whether this is something you can — and are willing to — commit to. Some operational questions are listed below.
- What are their biggest challenges?
- How many hours a week do they spend working on the business?
- When was the last time they had a holiday?
- How well-documented are the procedures?
- What skills or qualities are needed to run the business effectively?
Learn as much about the business and what it takes to run it successfully before purchasing. These questions will help to decipher whether the business is a good fit for you. With the amount of time and money it takes to buy and run a successful business, more information is always a good thing.
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