What Questions to Ask When Buying a Business

Many individuals who choose to go into business often look first for an existing business that might be for sale. There are many reasons for choosing this option over starting from scratch. Existing businesses usually already have a built-in customer base. If the business has taken good care of that base, it should also mean that it has a good, solid reputation. Other benefits for purchasing an existing business include a location (rented or purchased), equipment, materials, supplies, employees and much more. However, there can also be disadvantages to purchasing an existing business. Anyone looking at that option needs to know the right questions to ask.

Instructions

Typical Questions to Ask

1. Determine the asking prices of the business. A potential business owner needs an amount quote, as well as a description of how the asking price was determined. Business owners typically value a business based on what is being sold as a part of the business and a certain amount of cash flow. That cash amount is usually based on the cash that will come via accounts receivable minus that which must be paid out in accounts payable at the time of sale. Most will also plug in a certain amount of money for "good will" or "blue sky." This is over and above the actual standard valuation of the business. In order to determine if the business is worth the asking price, the actual "value" of the business versus the "blue sky" asking price must be separated and treated individually.

2. Find out if the building is locked in as part of the sale. If the business owns a building, they may or may not opt to sell it as part of the price quote. If it is included, it is incumbent upon the buyer to determine whether or not that negates further negotiation. Buyers considering a building purchase must make certain that the value of the building equals or exceeds its quoted price. That may require the potential owner to invest in certain inspections. These could include a termite, electrical, plumbing, heating/air conditioning and safety inspections. Oftentimes, the buyer can negotiate to split the cost of each inspection with the buyer. The building may require upgrades or changes as a result of these inspections, so that could become another point of negotiation in the asking price.

3. Obtain a list of equipment being sold, its ag, and its current market value. Some equipment can become outdated quickly. That may mean that the new business would need to upgrade or replace it. That could become a major sticking point if the owner is asking more than the equipment is worth.

4. Get a detailed list of materials, supplies and inventory being sold, along with its age and value. Since these items may become part of the collateral used to obtain a loan for the business, it is imperative that the lists be as comprehensive as possible. Outdated materials, supplies or inventory may require replacement, becoming an extra cost for buyer.

5. Get a list of business vendors with notes about existing credit lines, turn around times and any problems associated with them. Find out if credit lines will apply to a new owner or if better ones can be negotiated. Look for new vendors if old ones are too slow at turn around or if other problems exist.

6. Obtain a list of any outstanding copyrights, trademarks and/or patents and determine the status of each.

Look for Possible Problem Areas

1. Examine the business’s financial records, including profit and loss statements and cash flows. Determine how much money comes in each month and how much goes out. See how that translates to cash flow. See if there are certain months when sales are higher or lower and determine if cash flow is sufficient to see the business through those times. Look for ways to shore up accounts receivable problems. Keep an out for other potential problem areas and problem-solve to see if they can be overcome.

2. Review accounts receivable to see which customers are prompt, slow to pay and those who may need to be deleted altogether. A long list of existing customers isn’t any good if a good portion of them don’t pay on time or not at all.

3. Determine if the business owes any back taxes. Purchasing a business without asking that question can be dangerous. Once the business changes hands, all of its existing problems become the problems of the new business owner.

4. Find out if the business has any outstanding worker compensation claims or lawsuits pending. Not asking these questions can be costly both in time and money.

5. Determine if employees must be retained as part of the deal. Some long-term businesses will negotiate for their employees to be retained for at least a certain amount of time after the sale takes place. This can literally tie the hands of a buyer, keeping her from clearing the business of dead wood or excess employees. Therefore, this can become a major sticking point in negotiations.

6. Determine if the building can be rented if it is not part of the sale. The potential owner needs to know if the same leasing terms will apply or if new ones need to be negotiated. It is also important to find out who is responsible for building upgrades, maintenance and repairs.

7. Decide if the current owner should be asked to stay for a training period. If the buyer is already well versed in the type of business he is purchasing, this may not be necessary. However, if the buyer isn’t well trained in the specific type of business then having the owner there to train and ease him through the first few months can be invaluable.

Tips & Warnings

• Make a list of questions to ask before approaching any business owner.

• Negotiate any costs that seem out of line.

• Hire an accountant to go over the financial records with you.

• Hire a lawyer to review a building sale or lease.

• Don't feel you must purchase items that aren't needed just because the seller wants to unload them.

• Do not purchase any business that cannot prove that it is up-to-date with its taxes.

• Check with the state's Workers Compensation Agency to validate that the business owes no outstanding compensation claims and does not have any lawsuits in the works.

• Do not purchase a business that is being sued for any reason until the suit is finalized and cleared by the court.

Resources

• The SBA can provide support for potential business owners.