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.
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.
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.
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.
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.
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.
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.
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.
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