The top 10 questions to ask a seller before buying a business

There are many things to consider when purchasing an existing business. However, one of the best sources of information on the business is through the seller themselves. The seller should be able to provide you with all sorts of information regarding the finances, marketing, assets, ownership and operations of the business in question, so it’s important to open up a dialogue.

Making sure you ask the right questions is key to making an informed decision on whether or not to pursue the business purchase further. Important questions that are not addressed early on could have negative repercussions and cause significant delays to the acquisition down the line.

It’s not uncommon for a buyer to revise their offer for a business, or to withdraw from the deal completely after discovering a few more details about the company. These enquiries will form part of your due diligence, but will also offer a more direct approach to get discussions moving in the right direction.

Below you will find the top ten questions to ask a seller before you think about signing on the dotted line.

1. Why are you really selling the business?

This could be the most important question you ask, as it may have a bearing on how you make the business profitable, or it may make you think twice about agreeing to buy the business. If the seller says the company’s finances are a chief concern, that should be a red flag. On the other hand, if the seller just wishes to retire, relocate or has family obligations unrelated to the business, this presents an ideal situation.

Furthermore, any reticence on the part of the seller should be regarded as suspicious and you should not be afraid to follow up on any issues. If any negative discoveries are made, then a sensible buyer will always dig deeper or express their concerns directly to the seller.

2. Can I review the certified financial statements of income, cashflow and balance sheets for the last three years?

Businesses are often valued by their cashflow, so this will give you some additional information about whether the business has been overvalued, undervalued or if the seller’s price is a fair one. A successful buyer will be confident about putting in an offer for a business, even if it’s much lower than what the seller is expecting, because experienced buyers will always choose to make informed decisions. Also, remember that the bank will want to see these documents before lending.

It’s also worth asking if the firm maintains management accounts as well. If you are provided with these documents, be sure to question any inconsistencies between the management and financial accounts.

3. Can I see the company tax returns for the last three years?

Make sure this is the company tax returns and not those of the owner. Tax returns often paint a truer picture of the company finances, as the company will typically want to avoid HM Revenue & Customs being alerted to any irregularities. Again, company tax returns are also something that your bank will want to see before they consider lending you the necessary capital for the acquisition, if finance is part of your plan.

However, buyers should be aware that filed accounts and tax returns may still be legitimate, yet hide the real picture of the business. For example, where there are 'close' businesses, transfer pricing can be used to substantially alter the cost of goods sold, which in turn will have an impact on profits.

4. Can I see a copy of all documents relating to outstanding debt, including accounts payable, property and equipment?

Again, these documents will give you an overview of the company cashflow and, therefore, the company’s overall value. Also, any late payments may suggest that the business is struggling to stay afloat, or that its relationship with other vendors may be in an irreparable state.

These documents will also give you a better understanding of how company finances have been handled over the previous years. For example, you may find that the company has arranged a bad deal for the leasing of its premises or that it has an excess of unused equipment in storage. You should be sure to request the original sales and debtor ledgers too, and find out if they are computerised or manually stored. This again will help you build a truer picture of the company, its adherence to accounting best practices and how it has been run over the last few years.

5. Will you, the seller, be around to help in the transition period after the sale?

Not only will having the seller around for a period after the sale help smooth the transition, but it’s also wise to agree on some form of compensation for their services throughout this time. Of course, this may not be an option in every case, but it’s worth confirming with the seller as early on in the process as possible.

Where the compensation to the vendor for their services is dependent upon the performance of the company after the deal date, this is termed an earn-out arrangement. There are many variants but an arrangement of this type typically involves the buyer putting down a significant proportion of the selling price when the deal is struck. Further, payments are scheduled that are contingent on the performance of the business over a defined period after the sale. Earn-out arrangements are a common way to structure the sale of a business, though it’s worth researching the topic in depth, as it can often be quite a complex process to grasp.

6. Can I speak with the employees and managers, or is the sale strictly confidential?

If it’s the latter, then you should follow up with a question about why employees and/or managers have not been told yet. If it is a confidential sale, there are some concerns to consider, especially as employees tend to worry about redundancies when new owners come in.

If employees won’t know about the sale until it has gone through, then how and when you tell the them about the acquisition is crucial to the smooth running of the business.

If it’s only top-level management that has been informed about the decision to sell, then you should follow up by asking how they feel about the situation, either in person or through the seller.

All buyers should recognise that post-sale integration, and specifically integration of staff, is absolutely key to the success of any acquisition.

7. Has there been a high turnover in staff? If so, why?

If staff regularly leave the business, it could suggest a number of things, but chief among those concerns must be that perhaps the business isn’t sustainable on the current wages it pays, or the amount of work employees are expected to complete every day.

On the plus side, it could offer the buyer a quick win in terms of turning the business around and securing your leadership. It’s notoriously difficult to maintain company loyalty and productivity during a change of ownership, but solving existing staff concerns from the very start will likely go a long way to winning the team around.

Furthermore, staff retention may increase if you offer bonuses for hard work, team-building exercises to build morale or other such incentives to encourage key staff members to stay.

8. Is there a close relationship between the company and its customers?

Reputations are hard to build, and if the company is not highly regarded by its current customers, that could present a stumbling block along the way to making it a much more profitable business. It’s up to you to decide what level of damage you are willing to repair.

9. What are the conditions like in the working environment?

Be careful to note if employees are placed in any hazardous situations or significant risks to health and safety, as this can be an extra worry for you as a buyer. It may require regular, stringent checks by health and safety officials and you may need to purchase extra equipment to ensure your business is fully compliant with health and safety law. In addition, insurance cover for things like employee and public liability may need to be in place, which is another cost to consider.

10. What is the state of existing fixed assets belonging to the company, such as office equipment, machinery and vehicles?

Finally, finding out how well managers, supervisors and staff have maintained company equipment, machinery and vehicles is an important consideration for the future of the business. Poorly maintained company assets can end up being very costly in the long run, especially if the equipment is vital to the business and needs to be fixed or replaced regularly throughout the years ahead.

These questions are an excellent starting point in your discussions with the seller as part of the buying process, and will be key to establishing a comprehensive overview of the business and hitting the ground running once you have taken over.

Find a business to buy or if you’re looking for more tips on buying a business, have a look at our other articles on:
- The Due Diligence Process
- Legal essentials when buying a business
- M&A insurance: Are you covered
- How to negotiate the sale of your business

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