Buying a business has always been challenging, even for those seasoned in the process. A buyer should consider many critical factors before making the final decision. It begins with researching the company and its industry thoroughly and ends with determining whether or not the business is financially stable with future profit projections. After all, there is no point in buying a company that will not succeed or compensate the buyer somehow.
In this article, we’ll demonstrate the top ten questions to ask before buying a business.
General
Why is the business for sale?
Business owners may sell their companies for various reasons. While some sell their businesses to retire and enjoy a hustle-bustle-free life, others do that to collect some funds and reinvest in a new venture. The reasons are many, but no matter the reason, knowing why a business is being sold is of key importance to find out if the deal is worth the effort and, most importantly, the money.
What is the history of the business?
Digging deep into the company’s history is essential when acquiring one. It is necessary to find out who the company’s founders are, their background, their business management approach, how the company has been run in the past, and how they deal with clients or employees.
A business history can be as simple as asking for initial filings and financial records or more complicated as unearthing any previous or current regulatory violations.
Is the business acquisition affordable?
When considering a business acquisition without the possibility of bootstrapping, looking into external funding sources, such as obtaining loans, may be worthwhile.
Business acquisition loans are a type of commercial loan offered to business owners interested in buying companies. For example, investors seeking to purchase the shares or assets of an existing business can borrow money from a lender such as First Republic Bank, Wells Fargo, or US Bank.
Financial
What is the company’s financial status?
In order to decide whether to acquire a company or not, financial due diligence is important to determine if the business is healthy money-wise. Evaluate a company’s financial records by reviewing the audited past three year-end financial statements, income statements, balance sheets, and cash flows.
In addition, find out if they have any debt and look over some basic financial ratios such as gross profit vs. net sales and net income to total assets to make a better-informed decision.
Are the business’s revenues rising or declining?
A buyer should only acquire a company if it has a high probability of generating reasonable revenue. When researching a business, it is important to know if it is experiencing revenue growth or decline.
Revenue growth indicates the business is doing well, increasing profits and expanding operations. In contrast, revenue declines can be caused by economic downturns, shifts in customer interests, and market competition. If the business has had a revenue decline for several years in a row, this might indicate major problems in the business model with a dire need for improvement.
Legal
Is the business involved in previous or current lawsuits?
When acquiring a business, it is critical to check if any outstanding lawsuits, as being involved in legal cases could lead to further claims and issues, eventually resulting in bankruptcy.
If the business has been involved in any lawsuit, the buyer should know how those lawsuits have been resolved and what the outcome was, which would determine if any risks need to be addressed when acquiring the business.
Is the company involved in any current contracts?
An important consideration when acquiring a business is ensuring the acquisition will not violate any existing contracts between the company and its customers, vendors, or suppliers.
The buyer should have an attorney review all contracts to identify potential breaches. On the other hand, the target company’s management should disclose all material aspects of the transaction in writing to the buyer.
Market
What is the business status in the market?
Identifying the company’s target market, market status, and primary competitors can significantly contribute to driving the company’s success. Starting an acquisition without this knowledge can lead to issues down the line.
Such knowledge can reveal whether the company’s market is growing or shrinking and the threats the company may face. Consequently, this would help the potential buyer anticipate changes in the industry or target market.
Employees
What is the staff status in the business?
Acquiring businesses in good condition saves the new buyer time and money while trying to mend any problems after acquisition. Assessing departments and staff performance contributes to understanding each employee’s role and value to the business.
Regarding human resources, different aspects require analysis, such as turnover rate, employees’ roles and positions, and staff culture. Turnover rates can demonstrate the work environment, while staff culture provides insight into how this work environment affects staff interaction and attitudes.
Moreover, consider reviewing the company’s business code to learn more about its internal regulations and vendor relationships.
Assets
Does the business own or lease its properties, equipment, or products?
This is an important question to ask before considering an acquisition. For example, if the business leases its equipment, property, or products, then the buyer will be responsible for these costs once taking over operations.
In addition, it is imperative to check that the acquired business has all the necessary licenses and permits for a given field of operation. If not, the buyer will have to obtain any required licenses or permits to continue running lawfully.
Intellectual property is also something to consider before the acquisition, as it cannot be transferred through a lease or mortgage due to the lack of copyright and patent rights transferability. Additionally, it may result in transferring responsibility for its future taxation issues as well.
Conclusion
Once you embark on a new commercial or professional challenge, such as acquiring a new business, it is vital to understand what is driving the company’s success or failure. Asking the right questions with proper research, assessment, and analysis makes decision-making easier and more practical.