If you’re planning on buying an existing business now or in the near future, there’s a whole host of different questions you need to ask in order to determine if a particular choice is worth plunking money down for.
In order to qualify a business you’re interested, I’ve narrowed the following list of 5 important questions you can use to initially assess your purchase prospects, to determine whether it’s worth moving forward with a more extensive due diligence process.
1. How much is the business worth?
What it’s worth to them and what the fair market value is will likely be two different things. If not, they might be trying to sell at a loss in order to get out while the gettin’s good, or overvalue in order to recoup their losses. Either way, you need to understand how a business for sale should be valued and determine whether you’re getting a fair purchase price or not.
There’s a lot that goes into the pricing decision and you (the buyer) can waste a lot of time working a deal that’s anything but, if you don’t identify whether there’s any key warning signs such as increasing inventory levels, growing receivables, large scale asset sell-offs, and poor cash flow patterns to examine more closely before moving forward.
2. Why are you selling?
It’s a given that you should want to know the answer to this question when buying an existing business. Even if you don’t get a straightforward answer, you’ll still might be able to glean something from what the seller is telling you. Perhaps just knowing whether they’re being dodgy about answering honestly will be enough to help you do a gut check and make a smarter decision.
If their reasoning is negative such as market decline, or a lack of passion/commitment on their part, you can look further into the business to see if there’s something they’ve been doing wrong — or not at all — that you can come in and correct.
3. Where’s the most current business plan?
If they don’t have one, that’s a great indicator that the business has been operating with no clear leadership or plan-of-attack moving forward. If they do have a current business plan, you can use those details to determine whether their sales, marketing and money management have been sticking close to that plan or identify which stumbling blocks they’ve encountered.
Perhaps the product/service has maxed out its potential in the marketplace — become stagnant, or they’ve grown their service areas to maximum capacity for those services they currently offer?
It’s important to remember that you’re buying an existing business, and all the baggage they’ve accumulated. Just because it seems like you can push forward with it as it stands, or fix seemingly simple problems, doesn’t mean that it’s feasible to do so. You may be better off starting from scratch — building your own business up or even buying a stinker on the decline and closing the doors so you can create your own brand (this would have a huge effect on the eventual purchase price you’re willing to pay).
4. What’s the current cash flow?
The last thing any new owner wants to do with a business they’ve just purchased is to dive into their own pockets to keep the business afloat. Sometimes, in certain industries and circumstances, this is inevitable during the starting phase. However, for the most part, it’s a clear path to failure and financial ruin.
You’ll need to know just how much of the businesses capital you have access to now, and how much you’ll have access to in the months to come (receivables and current and upcoming purchase orders). Otherwise, how can you expect to cover all the day-to-day expenses like salaries, inventory, rent/lease, utility costs, supplies, and the worst of all — unforeseen expenses?
Read through the financials carefully, bring your accountant or business consultant with you if this isn’t your strong point. Ask pointed questions about atypical costs that have come up in the past, and other financial issues that might be coming up soon (ie., lease renewals, rent increases, equipment and maintenance needs, etc.)
Knowing a business’s cash flow will tell you a lot about their current customer base as well, yet another important consideration in making a pre-purchase decision.
5. Where will you (the current owner) be after the sale?
Some owners will just want to sell and get the heck out of Dodge, never to be heard or seen again. That’s their prerogative, but it might not suit you with this particular business. When buying an existing business, you need to know how to run one successfully, but you don’t always need to know each and every detail going in; particularly if there’s good management in place already.
However, you might find that you have questions that need answers in the weeks and months following the sale, and the current owner is most likely to be your most trusted resource in many cases. You need to know their intentions after selling. If you think they’ll be extra valuable to you, perhaps you can ask they sweeten the deal by requesting they be available to consult for a fee if they deem their time too valuable to sacrifice without compensation.
If they say no and you don’t see yourself integrating into the business without their help, perhaps this isn’t the right one for you.
Did you ever buy an existing business and regretted it?
Share your story in the comments. Tell us the business you bought and what questions you wish you had of asked beforehand that could have saved you from all the trouble that followed.
Main Image Credit: Ikhlasul Amal/Flickr