The Basic Questions To Ask Before Buying An Existing Business
As an entrepreneur, you know that buying an existing business is a great way to hit the ground running while avoiding the stress that is associated with building a business from scratch.
For one, you will be inheriting a loyal customer base, making it possible for you to dive straight into sales with little marketing little marketing effort.
Secondly, you will be inheriting the company’s existing staff. This means that you will acquire a trained staff and will spend less time and resources training new ones.
Despite these merits of acquiring an existing business, there are a few problems associated with this process of building a business. So one should be careful to avoid inheriting problems instead of progress.
To make the process easier for you, Sami Raja, the Managing Director of Sami Raja Consultancy will be highlighting the fundamental questions to ask before buying a business.
Here are the questions and what you should do to get the right answers:
Will the business remain profitable in the foreseeable?
In a recent publication, I discussed how to go about market assessment and the right questions to ask during the process. One of the points I mentioned in that article was evaluating and predicting the possibility of the market remaining profitable in the foreseeable future.
This question is similar to that. Before concluding whether to buy a business or not, make sure that the business has the potential to remain profitable in the foreseeable future.
One way to look at this is to examine changes in technology or manufacturing processes to evaluate whether there will still be demand for the product or services in the coming years.
Are there loopholes in the financials?
Nobody wants to wants to inherit a business with lots of financial loopholes which is why you should invest time into evaluating the financial standing of the organization.
Before buying a business, request for bank statements, tax returns, contract with suppliers and workers, profit and loss statements, and lease agreements.
In addition, make sure that every piece of equipment and inventory owned by the business is duly itemized and valued. If the business is large and requires rigorous scrutiny, be sure to hire a professional to help with all the paperwork.
Why is he or she selling the business?
An entrepreneur; especially a first-time buyer can so excited about the face value of a business that he or she may forget to ask the necessary questions. And this is one of the most important but often forgotten questions when buying a business.
So if you are reading this because you are in the process of acquiring a business, make sure you ask the owner why he is selling.
There are many genuine reasons why people sell their businesses. But in some cases, a business owner may be selling the business because it is no longer profitable.
Apart from asking this question, you should try to carry out background research. This will help you dig up reasons beyond what the owner is telling you.
What are the financing options at my disposal?
There are many ways to finance business acquisition so you should find out what will work best for you. You can decide to go for a one-time payment, loan, or private partnership.
In the same vein, you can decide to reach an agreement with the seller to finance the acquisition on instalment or pay a certain percent of the money down. If you are going with this option, then the decision lies with the seller but your negotiating skills will play an important role as well.
Is the success of the business tied to the owner?
Nowadays, we have a lot of organizations whose success is tied to the founder or owner. If you find out that the business owner (seller) is the face of the business (brand ambassador), it may be a sign to back off. Or you may reach an agreement to retain the seller as a member of the management team.
Another example is when the owner is responsible for the success of the business. We have cases where clients patronize a business because of the reputation of the owner. In this case, you can lose the customers once there is a change in ownership.
This is common with professional services like law firms. If you find yourself in such a situation, you can ask the owner if he can assist in ensuring a smooth client handover process.
These are the basic questions to ask when buying a business. If you need help with evaluating a business before the acquisition, feel free to get in touch with Sami Raja Consultancy.
About Sami Raja
Sami Raja is a serial entrepreneur with global corporate management experience in challenging and emerging markets. A renowned consultant, he is the Founder and CEO of Sami Raja Consultancy, a Dubai-based business consulting firm specialized company formation, tax management, business restructuring, and marketing.