If you are looking to expand your business by purchasing another company, it’s important to conduct thorough research. There are many factors to carefully consider before making such a significant investment decision.
Beyond financial due diligence, market analysis, and business plan development, it is crucial to ask the right questions to fully understand the business you are considering acquiring. To help you assess potential risks and future opportunities, we’ve compiled a list of 13 essential questions to ask before buying an existing business.
13 Questions to Ask Before Buying a Business
1. Why is the Owner Selling the Business?
It is very important to understand why the sale is taking place. Why is the current owner selling the business? Depending on the answer, it may reveal potential issues. If the owner is selling due to declining profits, internal problems or underlying market conditions, this may affect the return on your investment. If the owner is simply retiring, on the other hand, this could reveal an opportunity.
2. What is the Financial Health of the Business?
This question is one of the most obvious but remains critically important. Be sure to request detailed financial statements covering the past three to five years. These documents should include profit and loss statements, cash flow statements, and balance sheets. The more documentation you gather, the better equipped you’ll be to evaluate profitability, revenue trends, and overall financial stability.
3. What Are the Business’s Assets and Liabilities?
Assets, and liabilities, come in two forms: tangible and intangible. The tangible assets are easier to inquire about. They include physical items such as equipment, inventory or property. Intangible assets, such as goodwill and reputation, are harder to qualify and quantify but are important factors in any pre-business sale calculation.
4. How Does Cash Flow Work?
Cash flow is the lifeblood of a business. It reflects how money flows into the business as revenue and out of the business as expenses. Positive cash flow is vital for sustaining daily operations, driving future growth, and maintaining overall financial health. There are ways to boost cash flow for small and medium sized enterprises that ensure success in the long run. Both Invoice Finance and Business Loans can help businesses who are struggling with cash flow to manage their access to needed working capital in a sustainable and effective way.
Read our article on how to boost cash flow to learn more.
5. Are There Any Legal Issues?
It is important to understand the health of a business beyond just finances. Are there any ongoing or past legal disputes involving the business that you need to be made aware of? Awareness and understanding of any legal issues will help you assess and potentially mitigate relevant risks that may arise post purchase.
6. What Is the Customer Base Like?
While the business under consideration has been in operation for some time, you still need to conduct a robust market analysis. Determine who the main customers are, evaluate their loyalty, and develop an ideal customer profile. This is helpful for strategising ways in which you can sustain revenue and mitigate the risk of relying on just a handful of clients.
7. What Are the Current Contracts and Agreements?
Always take the time to review the existing contracts with customers, suppliers and employees. Before inheriting the obligations and liabilities of a business, you need to ensure you are aware of them and in full understanding of the implications.
8. What Is the Market Position of the Business?
Market research involves understanding the industry landscape, other competitors, market trends and overall demand for the products or services being offered. Knowing where the business you may be purchasing stands will give you the right information to identify future growth opportunities or potential threats.
9. How Experienced Is the Management Team?
If the business you are purchasing has a management team in place you need to assess their experience, success-rate, and capabilities. A strong management team that has the experience of running the business in consideration can drive future success and be a huge asset. However, lack of expertise or experience can hinder growth.
10. What Are the Growth Opportunities?
Having a discussion with the current business owner, as well as any managers, can help you identify already-existing avenues for potential expansion or improvement. Whether this includes new markets, new service lines or operational efficiencies, the aim is enhancing profitability and success.
11. What Licenses and Permits Are Required?
Ensure you understand the types of licenses and permits needed to operate the business in its respective industry. While some licenses and permits are transferable, others may be more complex to handle. Always ensure compliance with relevant regulations to avoid any negative impact on your future operations.
12. How Much Time Does the Current Owner Spend on Operations?
This question can help you gauge the potential your business has to offer. Understanding the time and effort required to run the business allows you to determine what role awaits you as a potential new owner. It also provides valuable insight into opportunities for streamlining or improving operations, if needed.
13. Does This Business Align with My Goals?
Finally, it’s important to consider whether this business aligns with your personal and professional aspirations. Ultimately, only you can answer this question. Consider your skills, strengths, and long-term objectives to confirm this investment aligns with your broader vision for success.
The ScotPac Team is Here to Help You Finance Your Purchase
Asking these questions will give you a comprehensive understanding of the business you’re considering purchasing. Thorough due diligence goes beyond financial records and statements – it helps mitigate risks and ensures you make an informed decision that aligns with your goals as a new business owner.
If you’re ready to explore funding options for purchasing an existing business, reach out to the ScotPac team today by filling out the form below or giving us a call. Our lending specialists are always here to help.
