8 Questions to Ask When Buying A Business
Buying a business can be a great way to expand your company’s market share, grow your revenues, or simply revitalize a struggling business.
However, like every worthwhile endeavor, you need to prepare in order to make the most of your investment. And that starts with asking the right questions during the buying process.
Questions to Ask When Buying A Business
Here are 8 important questions you should ask when buying a business:
1. Is The Business Worth Its Valuation?
To buy a business at a fair price, you need a professional valuation expert or business broker to help determine the true value of the business. Don’t take the seller’s word for it; you should conduct your own valuation study. You should consider the health of the Seller’s industry, industry trends, sales prices of comparable businesses, the state of the economy, and more.
A seller’s asking price is often higher than the average market price. So you may need to bring in an expert to help analyze and determine the actual value of the business. If the seller insists on doing it themselves, you should walk away.
2. Can I Finance Part Of The Deal?
Studies have shown that over 75 percent of all small business sales in the U.S. are partly funded by the seller. You may not need it but ask for it anyway. Sellers’ terms are usually better than the banks’ terms. Plus, if the seller is offering to fund part of the sale, it shows that the seller is very confident about the long-term potential of the business. So if you have the option, use it.
3. Can I Make The Business More Profitable?
You may think that the seller would have already done everything he could have to improve the business and grow net profits. But even if he’s willing to take action, he may not have the expertise, skill, or the capital required to make a significant shift.
With how quickly marketing tactics are evolving, it will require savvy management skills to make a business more profitable. More and more businesses are spending money on digital marketing strategies to grow and expand their businesses, and your competition continuously changes and expands as these marketing techniques continue to evolve. So if you don’t think that you can grow or sustain the business, there’s no point in buying it.
4. Will You Stay On After The Sale?
Be especially careful of entering a deal with a seller who doesn’t have the time or interest in helping with the transition. A transition can take several months or even years to complete. If you can, get the seller to agree to stay for as long as possible, at least until you’re well acquainted with the business or until you can find someone to run it.
5. What Is Trending In The Industry And What Challenges Am I Facing?
With the growing global competition, market challenges can come in many forms and from unexpected places. Knowing this information will help you determine who your competitors are and what opportunities are available in the industry.
Technology and software are the great equalizers, and you should ask the seller how they leverage technology and systems to successfully grow revenues and profits. Businesses that lag in this area can be left behind, and more technology-savvy businesses can leapfrog their competition and stand out in a sea of businesses.
6. Why Am I Buying a Business?
Owning a business is akin to owning an investment that has the potential to grow over time if properly managed. But don't invest with the aim of exiting soon. You need to think long-term. If you're only in it for short-term gains, you may lose money. According to BizBuySell, most businesses are sold at a 10 percent discount to their asking price, but that may not be sufficient to offset the downside impact of exiting too soon.
7. Who Is The Decision Maker?
When buying a business, it is important to deal directly with the seller. Otherwise, you will waste valuable time and resources negotiating with a surrogate who can't even negotiate the sale terms. To save time and effort, ask to speak with a decision-maker right off the bat before delving deeper into contract negotiation.
8. Do I Need An Advisor?
The sale value will determine whether or not you need a business broker to help close the deal. Keep in mind that most of the time a seller will be working with a broker to get the most value from the sale, but that shouldn’t keep you from hiring your own advisor to help facilitate a good deal for yourself.
A good business broker can help with a business valuation, deal negotiation, and drafting sales agreements. If you work with a brokerage firm like Raincatcher, you will be assigned a team of experts who will guide you through the entire buying process, help you find and connect with companies that fit your investment needs, and more importantly, help you negotiate good contract terms. Contact our team now for a free consultation and other perks.