Questions to Ask Before Buying a Business

Starting a business can be a life-changing decision. The ability to be your own boss and greatly expand your earning capacity can provide a much higher standard of living for you and your family. For many aspiring entrepreneurs, purchasing an existing business can be a wise choice, because it allows them to bypass the time and expense of establishing a business from the ground up. Are You Ready to Buy A CPA Practice?

Though buying a business offers significant advantages over starting from scratch, there are still no guarantees of success. It is important for buyers to do their due diligence, and ask the right questions to ensure the business is a good fit for them.

Here are six important questions business buyers should ask sellers before moving forward with a purchase:

What valuation method did you use to arrive at the current asking price: It is important to understand how the seller determined the asking price of the business. Did they use the asset-based approach, income-based approach (with multiplier), market-value approach, or a combination of the three? The correct approach depends heavily on the industry you are in, but one thing to watch out for is an overly emotional valuation; that is, a valuation based largely on the current owner’s emotional investment in the business.

What type of documentation do you have to support your financial claims: The owner should be able to clearly and accurately document the financial data of the business. There should be tax returns going back at least three years, and the owner should be able to document profits, losses, expenses, and income sources.

Are there any past, present or potential legal issues that you are dealing with: As a buyer, you want to avoid any unpleasant surprises down the road. Ask the owner if there are any litigation or other legal issues you should be aware of, and make sure to request the answer in writing. This will provide additional protection if something arises that contradicts the accuracy of the written statement.

What are the biggest challenges you are currently facing: Every business has areas in which they are struggling and/or need to improve. For example, they may be behind technologically and in need of some upgrades. Or there may be a tough competitor cutting into market share. Find out what the biggest challenges are, and what steps the owner is taking to overcome them.

What skills are required to successfully operate this business: This is one of the most important questions, because you need to know what it takes to succeed with this business and industry before jumping in. Find out what skills are required, and take an honest look at your own skillset to make sure you are putting yourself in a position to succeed. If not, this might be the time to walk away and look for a better opportunity.

Are you willing to continue with the company for a time and/or sign a non-compete agreement: So there are two parts to this question. First, what type of assistance is the owner willing to provide to ensure a smooth transition for the buyer? Will the owner stay on for a while as a consultant? Or even continue working in a part-time capacity? This can be especially helpful in retaining employees and satisfying key customers/clients. Second, is the owner willing to sign an agreement not to compete against you for a certain period of time? A non-compete agreement helps ensure you will not have a seasoned competitor in the market for at least the first year or two after the purchase.

There are several other questions you may need to ask, depending on the type of business and industry. Working with a business broker (preferably one with particular experience with transactions in your desired industry) can be helpful in knowing just the right questions you need answered. A business intermediary can help ensure you perform thorough research and find the business that best fits your passion, skills and budget.

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