Buying a business is a fantastic way to get yourself on the ladder to successfully living the entrepreneurial life of your dreams without the gruelling task of starting everything from scratch. It could be the first step on the journey of a lifetime; A lifetime of freedom and success- provided (and this is very important) that you buy the right business. But how do you know if a business is right for you? How do you know the difference between a good investment and a financial sinkhole? We’ve compiled a list of 15 questions to ask when buying a business that will ensure that you know exactly what you’re getting yourself in for and that you feel confident in making the right decision for you and your future business.   

1. What kind of business are you purchasing?

Firstly: what kind of business are you purchasing and can you envision it bringing you the life that you want in the long run? Things to think about are finance, location and lifestyle. Can you provide the finances needed to keep the business running successfully? Does the location work for you? Is running this business going to allow you the lifestyle that you want? Get clear on what you want from this venture and make sure the type of businesses you look at will provide it.  

2. How has the valuation of the business been done?

There is more than one way to do a business valuation and a good question to ask when buying a business is how the business you are looking at has been valued. Is the value figure that you have been given the current market value of the business? Or have they valued with an asset-based approach? Some valuations are carried out based on the company’s record of previous earnings. This may or may not be useful depending on things such as customer loyalty, management and market trends.

3. What is the business’ financial health?

It goes without saying that one of the most important questions to ask when buying a business is how it is doing financially. The business valuation should give you some indication but it is important to also do some research concerning cash flow and any financial liabilities such as outstanding debts including notes, accounts, interest and sales payable.

4. Are the financial records of the business on point?

Whilst you are looking into the financial health of the business it is also a good idea to look at the state of the records kept on those finances. Are the records consistent and up to date? Are there any gaps or missing information? Having a clear idea of a business’ current situation becomes very difficult if the records aren’t on point.  Worst case scenario you could be missing some extremely important information. Best case scenario you will be starting out your business venture cleaning up someone else’s mess.

5. Which assets come with the business?

Knowing which assets you need or don’t need and which come with the business is another thing to consider when buying a business. Assets can make up a big part of a business’ value, so ensuring those assets are part of what you are paying for is important. This might be one of the questions to ask when looking into the valuation process, which may have been asset focused.

6. How does the business create revenue?

Creating revenue is, ultimately, what you want from your business so make sure you are clear on how the business you are looking to buy does that and if it works for you. Can whatever service or product your business sells be expanded? Is there a market for it in the foreseeable future? Market research is important for anyone looking to buy a business to ensure that the product or service you will be providing can evolve and stay relevant as business and market trends change over time. 

7. Who are your competitors?

A very valuable question when buying a business is who your competitors are. Understanding this is a key aspect to your market research, knowing the business itself is not enough to ensure success- you also need to know what your up against so that you can adequately prepare yourself. Do some research on other business’ in the area and be sure to look at the ever-expanding online market too. Every business has competition, so find out what yours is before you buy to give yourself a head start. 

8. Do you need any licenses or permits to take over the business?

Depending on what your potential future business does, there may be some questions to ask around licencing and permits. Does the business you intend to buy need any licences or permits to legally operate? If the answer to this question is ‘yes’ you will want to make sure that these are either already in place or easily attainable and renewable. Some examples of licences and permits you may need to consider are: a local business permit, DBA, a health permit, fire inspection and permit.

9. How does the business operate on a day-to-day basis?

Before buying a business it is important to have a good idea of how the business runs on a day to day basis. The size of the business and the role you are planning to take will determine how much this is a part of your day to day schedule, but regardless of how active your role, owning a business means knowing how it operates. What needs to be done daily and weekly to ensure long term success? What does the daily checklist look like?

10. What is the situation with the existing employees?

With some existing businesses will come existing employees. When looking to buy a business it is a good idea to determine how things already stand with these existing employees. Is the relationship between employee and employer a good one? How flexible are they to possible upcoming changes you would like to make? Do you need more or fewer people than are already employed and what does that look like financially?

11. Is there a capable management team?

Depending on the size of your business there may also be a management team that you will need to work with. Before buying a business it is a good idea to investigate how capable this team are and if their managing styles suit you and the vision you have for your business. Starting your entrepreneurial business with a team of people who have a style of working that is compatible with yours will make things much easier for you. 

12. Is a business broker involved in the buying process?

One thing to think about when buying a business is if you want to employ a business broker. Typically it is advisable to have a broker involved in the buying process, as they have the experience and expertise to ensure that everything is carried out legally and in the fairest manner possible. They will be able to help you investigate and answer many of the questions mentioned here. They will also have access to the necessary contacts needed for the legal and financial side of things. 

13. Do you have a financial plan for the business?

Another of the integral questions to ask when buying a business is if there is an existing financial plan. A financial plan should include a review of the financial reports of the business in order to give a clear picture of income and profit loss. It is important because it can help you to see both the current financial situation of the business and therefore its future potential. 

14. Has the sales agreement been reviewed by a lawyer?

With any sale comes a sales agreement and perhaps one of the most essential questions to ask when buying a business is if yours has been reviewed by a lawyer. The sales agreement is a binding contract so you want to make sure that everything is legitimate before you put your name on it. Having someone who understands the legalities to outline and explain what you are agreeing to is invaluable when making a large investment and not a step to be skipped. 

15. When and for how long is the handover?

As a seller, the previous business owner has a set of obligations and legalities to carry out which should include adequate planning of the handover process. The handover of a business usually takes a period of time, but with good planning and communication between both parties, this period of time can be agreed upon to suit both buyer and seller. The handover process may include: introduction to important clients and suppliers, introduction to employees and notifying banks, insurers and utility suppliers.

Questions to ask when buying a business: answered by a reliable partner

With all these questions to ask when buying a business, the process may seem a little overwhelming. At GMO we have a team of professional and experienced business brokers dedicated to helping potential business owners find the answers they are looking for. The process of buying a business does not need to be stressful and overwhelming. We can use our expertise, knowledge and contacts to ensure that you have a smooth and successful start to your business venture! Get in touch and let’s get started!