Burning questions every buyer wants answered
Every prospective buyer wants to know how to analyze a business for sale. If you are seriously considering buying a business, then you need to be prepared to ask the right questions. Each business transaction is unique, but there are some routine questions and common concerns that nearly every prospective buyer has.
1. Why is the Business for Sale?
Retirement, relocation or a family event are perfectly acceptable selling reasons to most buyers. It is almost never the case for a business to be on the market because it simply does not work anymore; there are many other reasons. However, you need to find out if the real reason is the financial decline or various other obstacles. Once you find out the real motive behind the sale, you can see its true investment potential. In the US, a business sells, on average, every 8 years and that's perfectly normal.
2. Is the Business a Good Fit?
This is something you need to decide on your own. Do you have the knowledge and skills to properly run the business and lead it to success? Is it in the desired field of activity and in the right location? Do you have the financial means to complete the purchase? Will you be able to make the necessary profit? If the answers to these questions are positive, then the desired company is a good choice for you!
3. Is the Business Profitable?
This is one of the most important questions. Listen to what the seller says, but then ask for supporting documentation. If you do not have the knowledge to analyze it, ask for the help of a professional accountant or someone who can help you understand it. Never rest on the assumption that everything is fine, rather than double-check any information. Look into the financial statements and determine whether there is a healthy trend for revenue growth and whether this seems to be a steady trend over time. If the business is not profitable, it may still have intrinsic value to you. You have noticed the necessary changes to increase profits, you need a suitable location, equipment, employees, an intellectual property or brand. Make the seller an offer with a price generated by their value to you.
4. What Is the Company’s Position on the Market?
Find out if the business is uniquely positioned on the market, or if it offers products or services that differentiate it from competitors. Analyze the development perspective of operational products or services and processes to evaluate the ability of the business to maintain its market position.
5. Is the Price Right?
A smart buyer will ask for detailed evidence to validate the information the seller presents, including how he determined the selling price of the business. To make sure that buying a business is a solid investment, you need to make sure that you are not paying more than it is worth. There are several methods of valuation, so it would be best to call on a professional business broker.
6. Is the Business Staffed with Experienced Employees?
Highly qualified and experienced staff can make the difference for you, because those who will stay with the company for a certain time offer you stability and continuity in daily activities and functional relationships. This is an example of added value, which greatly increases the attractiveness of taking over an existing business.
7. Does Your Business Have an Established Customer Base?
An established client portfolio and customers who will maintain their relationship with the company after its sale is another strong argument to buy an existing business. This shows that a business is well established in the market, having a loyal group of customers. The vast majority of start-up businesses have problems right from the start, because of the underestimation of on-boarding costs for a new client.
8. Can the Business Be Financed?
Getting the necessary financing from a bank can be a challenge, but not an impossible mission. It depends a lot on the history of the business you buy and your eligibility to obtain the type of requested loan. This, however, leaves the seller with two other options: either lowering the selling price or work with you to overcome financial challenges. Financing from the seller’s side is normal, as it increases the number of potential buyers and opens up the real possibility of closing the transaction at a better final price.
9. Is the Lease Transferable?
If the business is very much dependent on the current location, leasing the space is a critical factor. Before going any further, check the terms of the contract and the conditions under which it can be transferred to a new tenant. There may be some limitations, such as personal guarantees, which are not favorable to you. If the lease cannot be assigned to the new business owner, find out the procedure for the new owner to be approved for a new lease.
10. Are There Hidden Complications?
Ask the seller if there are any issues you should know about. Most likely, they will be discovered anyway during the due diligence process, so you'd better find out directly. This approach can save valuable time for all parties involved in the negotiations. Hidden issues can be of any kind, such as legal liabilities, financial problems, labor relations, a problematic customer relationship history, or any other risks that may affect your business purchase.