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Everyone makes big-ticket purchases. You’ve bought a car and maybe a house, and they don’t seem to be big deals.
Now, you’re on your way to make another big-ticket purchase; and this time, it’s not a material possession but a full-blown business.
This purchase is a big deal. The business you’re purchasing will be a primary source, if not your only source of income. Exercise due diligence before deciding, as this may be your most important decision ever.
While there is a long checklist of things to do before making your purchase decision, none is as important as interviewing an individual that’s part of the business executives.
Asking questions also isn’t as crucial as asking relevant questions. Since asking relevant questions might be tasking, we’ve compiled a list of the best questions to ask when buying a business.
Without getting satisfactory answers for each of these questions, you might be making one of your worst purchase decisions ever.
Questions to ask when buying a business
1- What’s the handover period?
When buying a business, you don’t just pay and let the previous owners walk off. Customers have built relationships with the owners over the years, and abruptly ending that relationship can ruin a business.
The handover period is a specific amount of time the seller spends in the business, helping you make a good transition. This time helps to minimize the effect of the previous owners abruptly leaving.
If the previous owner of the business agrees to a respectable handover period, you might be in for a good deal.
However, if they refuse to help you transition into the business, you should avoid buying into it. Typical business purchases always include a handover period, regardless of the niche.
A handover period may last weeks or months. The handover period should be over when the previous owner has no help to render anymore and is only getting in the way.
However, it still doesn’t mean you won’t feel the absence of the original owners; it just minimizes it.
2- What are your biggest challenges right now?
Every business that’s up for sale will be facing some challenges. To be realistic, buying a business without knowing the challenges you’re buying into is akin to buying a bag of trouble.
Most businesses battle with poor financing, lack of the required staff, or even little knowledge.
Before making the purchase decision, you should make sure you can solve the problems facing the business. If you don’t have any plans to overcome the challenges, you’ll also be putting up a business for sale in no time.
The second best way to know the challenges is by purchasing it and running it yourself. The best way is by asking the sellers directly. The choice is yours.
3- Do you have any pending or past lawsuits?
Businesses face many challenges. Before buying a business, you want to make sure that you’re bracing up for all upcoming challenges.
One challenge that you should try to avoid as much as possible is lawsuits. The previous owner of the business might only be in a hurry to sell it due to impending legal trouble.
If the former business owner is willing to help resolve the lawsuits, you should worry less. However, the best option is to avoid lawsuits in general; you don’t want to spend years trying to bail yourself out of random cases after the purchase.
4- What skills and qualities are required to run this business effectively?
Many people buy businesses without the qualities required to run one, and here, qualities don’t mean perseverance and belief in yourself.
If you’re buying into a software development company, you need skills like software engineering and leadership.
The seller of the business knows what skills are the must-haves to manage the business. Before buying, you must learn the same to help you hire relevant employees.
If you have none of the required skills, and you’re not willing to hire to cover them, it doesn’t matter how much you like the business; it’s not for you.
5- What will happen to the employees after the sale?
After buying a business, the previous owner generally ends the employees’ contracts, which you can choose to renew if you think they’re a good fit for your company.
However, not every business purchase leads to employee retention. Sometimes, you may want to overhaul the company’s workforce to enhance productivity.
If this is the case, you may need to take measures to ensure that you’re not shooting yourself in the foot. There are employees with knowledge of vital secrets about the company.
Don’t dismiss all workers without some measures to prevent them from revealing secretive information to competitors.
Have all the employees in the company sign non-disclosure and possibly, non-compete agreements to keep you on the safe side.
6- Why are you selling this business?
People sell their businesses for many reasons. While some of the reasons are no cause for alarm, some are plain bad, and you shouldn’t buy a business sold because of them.
If the business owner is retiring or would like to try something different, their businesses are safe to buy and will be profitable for the near future.
However, if the owners can see some oncoming negative trends or are heading for a decline, you may be buying into a problem.
It may be almost impossible to extract an honest answer to this question with a mere interview. Digging deep into the company’s history and financials can help deduce why the company is up for sale.
If you don’t want to put your business on sale in a couple of months, you should try to find an answer to this question in any way possible.
7- Will you finance the purchase price?
Before buying a business, inquire about the possibility of getting seller financing. Seller financing is quite common in the United States, as almost 80% of small business sales involve this process.
Seller financing, also known as seller carryback or owner funding, involves the seller funding the purchase price. The seller acts as a bank, covering a significant percentage of the purchase price.
After the sale, the buyer will gradually refund the purchase price with interest.
Even if you’re not interested in taking up the offer, you should learn about the possibility of getting a seller financing deal.
This offer shows how confident the seller is about the performance of the business in the long term. It also makes it easier to fund big business purchases without shelling out too much money, effectively reducing the risks.
8- Can I see the business’s financial records?
There is a significant difference between buying and starting a business. When you start your own business, there are no assets, and all balances start from zero.
However, when you purchase a business, there are assets and employees already and many financial records.
You should see some financial records before buying a business to determine how it has been doing over the years.
At least, the seller should provide three years of financial records, tax returns, business assets, wage accounts, and the Business Activity Statements for the last four quarters.
These records are enough to determine the performance of the business over the years. If you’re not good with accounts, you can have your accounts manager check them out to confirm you’re not buying a liability.
9- Do you depend heavily on a major customer?
Purchasing a business that depends heavily on one customer is an unwise investment by all means.
The prime customer has likely developed a close relationship with the previous owners, and you taking over the company means the relationship has ended.
The termination of this relationship could spell doom for the company, as an enormous part of the company’s revenue will be at stake.
While a respectable handover period can help minimize the impact of this change, it doesn’t eliminate it. It doesn’t matter how well you make the transition; you’ll lose some customers.
If the company doesn’t have a diversified customer base, it has a good chance of losing its most valuable customer, essentially ruining it.
Before buying a business, confirm that the customers are diversified so you can keep some of them at least.
Conclusion
Buying a business is objectively better than purchasing material items like cars or houses. However, it’s only really better if you don’t lose out on the sale.
To avoid buying into a crashing business, you must gather crucial information about it to inform your purchase decision.
You can only learn so much from searching Google. There is no better way to gather information about a company than by asking the owners.
Here are nine questions you should consider asking the owner of any business you’re planning to buy to help inform your buying decision.
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