Buying a business can be an exciting and worthwhile investment. However, before jumping in, there are certain important questions you will need to ask the seller.
This is part of the due diligence process: investigating all aspects of the business before making a final decision on whether or not to purchase. It’s an opportunity for you to get a better understanding of what the business entails and what challenges you may face down the road.
If you’re wondering what to know before buying a business, read on. In this guide, we’ll share nine of the most important questions to ask when buying a business – UK or elsewhere.
1. Why Are You Selling Your Business?
One of the most important things to know before buying a business is why the owner is selling. This will provide insight into their motivations and expectations. It will also help you gauge how negotiable they may be on price.
There are many reasons to sell a business. The owner may be retiring, relocating, or simply moving on to something new. However, alternatively, the sale could be motivated by falling profits. Whatever the reason, you should be well-informed so that you know whether to proceed with the acquisition.
2. How Did You Calculate the Asking Price?
Determining how the seller arrived at their asking price will help you to understand whether their expectations are realistic, and how much flexibility there may be. Among other things, the asking price should take into account:
- The value of the business’s assets
- Its annual gross and net profits
- Its customer base, market share and growth potential
- Recent sales of similar businesses in the area
Ensure the seller has had their business professionally valued by a business broker – ask for proof before proceeding.
3. Does the Business Have Any Debts or Liabilities?
Before making an offer, you’ll need to see proof of the business’s revenue and cash flow. Additionally, however, one of the key questions to ask when buying a company is whether it has any debts or liabilities. For example:
- Loans or mortgages that need to be paid off
- Outstanding bills or invoices
- Any legal fees that may be owed
- Whether any equipment has been bought on hire purchase
This information should be included in the financial statements that the seller provides, but it’s wise to double-check that everything is accounted for.
4. Can I See Your Current Business Plan?
Ask to see the seller’s current business plan. This will give you an idea of the company’s objectives, financial health and potential for growth.
Is the business due to undergo any developments or expansions? What are the current projections for the next financial year? Are there any anticipated changes in the market that may occur in the foreseeable future? These are all important questions to ask before buying a company that should be revealed in the business plan.
5. What Assets Come with the Business?
If you are making an asset purchase, you’ll need to understand exactly what you’re buying. An asset is any item of value, such as:
- Business premises, buildings and land
- Equipment and machinery
- Furniture, fixtures and fittings
- Company vehicles
- Intangible assets such as intellectual property
You need to know what is included in the sale, as well as which assets are (and are not) owned outright. If any assets are hired or rented, you should also find out the terms and conditions of the lease(s).
6. Who Are Your Most Important Employees, Clients and Suppliers?
When making an acquisition, you’ll take on the company’s employees, customers and suppliers as well as its assets. The business wouldn’t exist without them, so find out:
- The names and roles of key employees who hold the most expertise about the business
- Details of the longest-standing and highest paying clients
- Any key suppliers that the business relies on, and details of any contracts in place
Asking these questions when buying a business will allow you to make sensible decisions when it comes to restructuring.
7. What Are the Company’s Biggest Weaknesses or Challenges?
Asking the seller to explain the company’s most significant challenges will help you anticipate future difficulties you may face.
For example, are there any significant parts of the market that the company struggles to reach? Which competitors post the biggest threat to the business, and why? These are some of the most crucial questions to ask a business owner before buying.
The current owner should provide an honest assessment of the business’s weaknesses. If they refuse to be open with you, it could be a red flag.
8. Are There Any Past, Ongoing or Anticipated Legal Issues?
Carrying out legal due diligence when buying a business is extremely important. This means investigating any past or current legal issues that could cause problems in the future. You should investigate:
- Whether the company has ever faced legal action
- If there are any ongoing or anticipated claims from employees or members of the public
- Whether the business is up-to-date with all relevant licenses and permits
Remember that you could be held liable if you acquire a business that has any outstanding legal issues. Have an expert carry out due diligence to ensure that there are no hidden problems.
9. Would You Consider Staying On after the Sale?
When buying a business, it is common for the seller to stay on for a period of time after the sale. This could be anywhere from a few weeks to a year or more.
This allows for a smooth transition period while you to get to grips with running the business. You’ll also benefit from the previous owner’s experience, help and advice.
You could offer the seller a contingent bonus for staying on, which will be paid out once the business meets a certain goal. Alternatively, the seller could stay on in a different role, such as as an adviser.
Looking to Buy a Business? Contact Chelsea Corporate Today
If you’re considering buying a business, get in touch with Chelsea Corporate. As merger and acquisition experts, we specialise in matching clients with profitable, successful businesses in all industries.
Provide your details and you’ll have access to our exclusive database of off-market businesses. We’ll handle the entire process for you, from negotiations to due diligence, so you can be confident that you’re getting a good deal.