When buying a business, it is an exciting time.
Many approach the transaction with enthusiasm and the dream of growing something unique
In all the excitement you need to look under the bonnet and see what makes the business tick
It is a unique transaction, but there are some standard questions one should ask every time they start the buying process.
When asking these questions be inquisitive. Look wide, compare, analysis and if something doesn’t seem right don’t dismiss it as trivial.
There are many unknowns when buying a business. Things that a potential purchaser may not be aware of that you need to discover in the business purchase process. Taking the time to plan, understand what the business is you are buying may eliminate any headaches after purchase Take the time now to work out if the purchase is right for you!
Here are 5 important questions about buying a business you should ask the seller.
Why are you selling your business?
This question should be at the top of your list.
It’s the first question to ask a seller when buying a small business. It’s a question that needs to be asked early in the discussion. The seller’s answer should make sense and be believable. The answer may be the key to setting the tone as to how the negotiations may take place. For example, if someone is selling due to ill health, marital problems etc is a quick settlement possible. On the other hand, a wishy-washy answer might indicate systemic issues ahead.
Look at the way the owner reacts to your questions. Often, answers given deflect the proper position of the business. For this reason, a combination of all approaches indeed provides the best picture of the business and its potential.
Lets take Fred. The business is for sale. Julie a potential owner notices sales have dropped of in one area of the business. Julie asks the obvious question – why? Fred states he hasn’t been well but what Julie finds out later is that Fred had an argument with one of his major customers and they refuse to buy from him reducing his sales turnover considerably.
How can I increase sales, and who is your biggest customer?Buying a business has potential but what is it!
When you look at a business you might ask has the owner has done everything to make the business extremely profitable? However, sometimes the existing owner has lost interest, run out of money, or doesn’t have the innovative ideas to move the business forward. Look at the financials and accounting records. See who is the business’s biggest customer. How much revenue does it bring in the business? A loss of a significant customer can rock any business, together with a downturn in the industry, which leads to the business not being as profitable as it is promoted to be.
Buying a small business means you need to look at the businesses records
Don’t be afraid to ask what you need to make an informed decision!
Ask for Bas returns, tax returns and have your accountant do some analysis
May I see the last three years of financials prepared by your accountant?
Numbers tell a story! The business numbers will show trends. Either river of potential profits or problems ahead. Either way, you can plan, strategize and make the right decision. As your accountant, we like to recast the financials in a way that will help you see your potential business and profits So often see internal financial statements that make no sense or have been prepared by the owner. Accurate financial statements by an accountant, tax returns, and BAS returns are essential to verify the source of the truth. Use the seller’s numbers as a base from which to “recast” and project your future business. We can help you adjust the data for how you’ll run it. We can then see the potential or lack of in some cases.
Will the old owner, stay with the business after the sale. What’s your preferred timetable to leave once the business is sold?
In most cases, you would hope that the owner will agree to help you make the transition. Negotiate a period of handover which could range from a couple of days to a month or 2. Be cautious of any arrangement where the seller won’t stay or do any handover Some sellers will put conditions on the sale, like employing his wife for an extended period to continue to do the books. Be wary of these arrangements. Ask the current owner what sort of instruction manual they have and what staff are likely to remain with the business. How friendly are they, and this also may reflect how they treat their staff and customers.
Are there any impediments that may delay the sale of the business.
It is an emotional decision for a business owner to let go of their business.
They may have in their mind a specific time for the sale to take place. There may also be some hurdles you may need to negotiate, from moving the business to getting access to the database and working with the existing team. Talk to the owner to understand where they are at in the process.
Are they legal matters ongoing that may require the original owner to resolve before you buy?
Another big impediment is the landlord where the business is located.
The Transfering a lease can take time for the landlord to agree so make sure this too is addressed early in the negotiations
Ask and you will find
Your questions have a dual purpose. One is getting specific information about the business and the other is understanding the business owner. In particular their motivation, attitude to the business, staff and customers.
There are lots of small businesses for sale on seek business . Take the time to work out which ones really have potential
But more important understanding how the owner ran the business and what potential the business has. The numbers will tell 80% of the story, but it’s often the questions you ask that help your” gut” understand if it’s right for you.
Good luck when buying a business and don’t be shy in asking lots of questions and reading between the lines.