If you have listened to the Beyond 8 Figures podcast, you might have noticed that we are big proponents of buying a business as a way into entrepreneurship. It’s often easier and less time-consuming than growing a business from scratch but just as rewarding. So, do you already have your eye on the company of your dreams? Gear up with these 5 key questions to ask before buying a business.
It’s all about asking the right questions and digging a little deeper when a large sum of money is involved. After all, you want to make a well-informed decision when buying an existing business. That’s why you need to do your due diligence, go deep into research, and talk things through with the previous owner.
We’ve put together some questions you can ask before buying a business. When you have the answers, you’ll feel much more confident laying down money for your new venture, that’s for sure. So, let’s dive in!
Key Takeaways
- Buying a business requires extensive research. Asking the right questions can make all the difference in gaining a better picture of the overall state of the company.
- The business owner’s motive behind selling can provide significant insight into the company’s current state. Ideal scenarios often include reasons unrelated to the business’s condition, such as the owner’s retirement, relocation, or family obligations.
- Before the purchase, having a clear financial picture is essential. This includes examining past financial statements, tax returns, profits, losses, and business activity statements with the help of a financial advisor or accountant.
- Understanding the tangible and intangible assets that come with the business can help assess the overall value. Assets may include physical equipment, social media accounts, valuable clients, and more.
5 Key Questions to Ask Before Buying a Business
Buying a business requires extensive research and in-depth investigation. It’s important to use the right questions as a guide to make well-founded decisions. Here are the five most useful ones.
Why Are They Selling the Business?
This is the most essential question to ask a business owner selling their business. What’s the reason behind the sale? The answer may change everything for you, including your decision to buy the company. Who knows, you may not like what the previous owner has to say, so you eventually withdraw from the deal. That’s why it’s vital to address this question as early as possible in your negotiations.
One of the most ideal reasons for selling would be if the owner decided to retire. Other acceptable situations would be relocation or family obligations. The rule of thumb is to look for deals where the reasons for sale have nothing to do with the state of the company.
How Is The Business’ Financial Health?
This brings us to the second most critical question to ask before buying a business. That is, what’s the financial health of your company? Ask the owner about the business’ state and dig into the answers until you get a clear picture. It’s always best to be safe for business transactions of this nature.
Work with an accountant or financial advisor to investigate the financial statements from the past three to five years. At least look at profits, losses, and balance sheets, the last income tax return, and business activity statements from the last four quarters. All these details will help you ensure everything is financially safe and sound.
What Assets Come With the Business?
One of the key questions to ask before buying a business is what assets come with the sale. Ask the owner about a listing of every asset that the business sale would include. This refers to tangible assets such as the company’s physical equipment, but also intangibles like social media accounts and profitable clients. Before you make a purchase, it’s necessary to understand the inventory you’ll be getting in the sale, as this can help you better evaluate the overall value and potential challenges later on.
Who is Their Competition?
Knowing the competition is critical before you enter any type of business arena, let alone an existing venture. You need to know your competitors inside and out before you purchase a business. This can give you invaluable insights into the market dynamics and customer preferences, ultimately preparing you to effectively compete with others once the business is yours. So, make sure you do your research on other businesses in this industry before you sign any deals. You don’t want to end up making uninformed decisions that could adversely impact your business.
What is Their Relationship with Their Clients?
The company’s reputation dictates its success in the long term. Ideally, you want to buy a company that holds high standards for their customers and treats them with respect. So, before you make the final decision, figure out the relationship between the business and the clients. If there are any issues, it’s better you know about them in advance, especially before agreeing on the sale price. On the other hand, a positive reputation is definitely a green flag and a potential sign for you that the company is doing something right.
Set Yourself Up for a Successful Business Purchase
Buying a business is no small feat. It’s all about doing extensive research and investigating every facet of the company that you can. So, make sure you ask the right questions to make the right decision.
The process of deciding whether you should or shouldn’t purchase a company is long and rigid. But that’s how it should be. You don’t want to push your luck with such a huge business move. Instead, equip yourself with the above questions and set the stage for a smooth and successful business purchase.
