Questions To Ask The Seller & Yourself Before Buying A Business

Questions to Ask the Seller & Yourself Before Buying a Business

We’ve listed these questions for use as a readiness guide for a Business Buyer who is evaluating a purchase
opportunity with a few reflective questions, thrown in for good measure.

Questions the Buyer Should Ask The Seller

The Business

    1. How long has the business been in operation?
    2. Where is the business located?
    3. Does the business have a good reputation? (check social media reviews,
      BBB, etc.)
    4. Are the product and services attractive and legal?

The Seller

      1. Who much does the seller take in salary? Benefits?
      2. Is seller financing available?
      3. Why did the Seller start or buy this business?
      4. Why is the business for sale?
      5. Will the Seller stay on as an employee or exit after the transition?
      6. Is the seller willing to agree to a non-compete?
      7. Is the business highly dependent on the personality of the owner, or is
        it fairly independent from the owner?

Financial

      1. Does the business have a written business plan?
      2. In what condition are the business’s financial? (Tax returns, P&L,
        Owner Recollection?)
      3. Can the owner provide 3 years of tax returns and financial statements
        to support sales and owner benefit? If no, what prevented them from
        doing so?
      4. Is this a “cash heavy” business? Is this business capturing cash sales?
      5. Are sales steady, increasing or decreasing? Why or why not?
      6. Are margins and profit steady, improving, or decreasing?
      7. Are there any liens or judgments against the business?
      8. With whom and for how much is the business indebted?
      9. Are their issues with suppliers and/or customer needs and demands that
        would effect sales or costs?
      10. How much working capital is needed to operate for 30-,60-, 90-days?
      11. Does the company have a good credit and reputation with suppliers?
      12. Are there “holes” in the financials? If yes, is it a result of fraud,
        poor book-keeping, or another problem.
      13. What makes up the owner benefit?
      14. How does the business earn revenue? Are there single or multiple
        revenue streams
      15. How quickly does the business get paid after delivery of products
        and/or services?

Legal

      1. Are there any ongoing lawsuits or concerns?
      2. Have the seller provide all contracts relevant to operating the
        business: employee, leases, service providers, client contracts, etc.
      3. What zoning or industry regulations for the location? are there
        anticipated changes that could affect the business? If the business is
        relocated, what are the zoning requirements?

Market

      1. What is the geographic or virtual marketplace?Who are target customers
        and is the market growing, stable or shrinking?
      2. Who are target customers and is the market growing, stable or
        shrinking?Is there a client concentration If so, what would happen if
        that/those clients left?
      3. Is there a client concentration If so, what would happen if that/those
        clients left?Who are the seller’s major competitors? How does this
        business separate itself? What further opportunities exist for further
      4. Who are the seller’s major competitors? How does this business separate
        itself? What further opportunities exist for further diversification?
      5. Are there any untapped or untried expansion opportunities already
        known?

Sales and Marketing

      1. What are the trends and outlook for this industry and this
        business?Does the business have a written sales and/or marketing plan?
      2. How is this business currently selling its products and/or services?
      3. How does the business find new customers?
      4. Are the current relationships in jeopardy should there be a new owner?
      5. Will demand for the services and products continue after seller exits
        the company?
      6. Will key sales and service personnel stay under a new owner?
      7. What sales initiatives have recently worked well? Not worked well?
      8. What are the most and least effective marketing campaigns int he last 2
        years?
      9. Is the business cyclical or seasonal? If yes, describe.
      10. What are the next full years’s projected sales?
      11. If sales are rising, is the increase due to growth in the market or to
        raising prices?

Procedures

      1. Does the business have a written Procedures Manual?Does the business
        have an emergency procedure in place?
      2. Does the business have an emergency procedure in place? Are any
        procedures proprietary?
      3. Are any procedures proprietary?
      4. Are employees cross-trained?
      5. How do you train your employees? Internally, outside training and
        education, mentoring?
      6. Are there any licenses required to do certain jobs? Detail the
        requirements.
      7. What opportunities are there for process improvements? Are there any
        neglected investments in innovation and technology?

Assets

      1. If the transaction includes A/R, how is the aging and concentration of
        those accounts?I the transaction includes inventory, how much is obsolete? Do they
        have a current inventory list with values? If the transaction includes
        equipment, what is the current value and condition? Is any equipment in
        need of repair or replacement?
      2. If the transaction includes equipment, what is the current value and
        condition? Is any equipment in need of repair or replacement?
      3. Will any intellectual property, proprietary processes or exclusive
        products ownership rights transfer to you?What is the total goodwill
        included in the sale?
      4. What is the total goodwill included in the sale?Does the business own
        or lease its space? Is a lease assumable or is the landlord open to
        negotiating with a buyer? If the seller owns the building, is the
        property included in the sale or is is available for lease?
      5. Does the business own or lease its space? Is a lease assumable or is
        the landlord open to negotiating with a buyer? If the seller owns the
        building, is the property included in the sale or is available for
        lease?What is the company’s reputation? Does the sale include phone
        number, email addresses, website, and other social media?
      6. What is the company’s reputation? Does the sale include the phone
        number, email addresses, website, and other social media?Are licenses,
        permits and/or certifications from industry organizations current and
        posted?
      7. Are licenses, permits and/or certifications from industry organizations
        current and posted?What special licensing or permits are needed, if
        any, for this business?
      8. What are special licensing or permits needed, if any, for this
        business?
      9. What types of insurance policies are in place? Can you take over the
        policies as part of the sale?

Suppliers

      1. Are the suppliers willing to transfer the existing contracts to you
        when you take over the business? Is the seller willing to make a
        personal introduction to the buyer during the transition?
      2. Does the business have multiple suppliers or just a few?
      3. Is the price of goods and materials steady, increasing or decreasing?
        What is causing these changes?
      4. What inventory levels does the company maintain? Too much can be a sign
        that the company is struggling to move product or is spending too much
        maintaining inventory.
      5. How many turns occur per year, and what is the industry average?

Employees

      1. Is there a written HR/Employee manual?
      2. How many full and part-time employees are currently working with the
        business?
      3. Are any or all employees leased or 1099?
      4. What employee benefits are offered? How much do they cost? Who is the
        providerDoes the business have many long-term employees or is there
        high turnover?
      5. Does the business have many long-term employees, or is there high
        turnover?
      6. Describe what positions are key in the company. Who currently holds
        those positions and what are their duties? Are key employees staying
        after a change of ownership?
      7. Are any seller’s relatives or friends employees? What roles do they
        fill? Will they stay or leave after the transition?
      8. What is the company culture like?
      9. Is there a current succession plan in place for key employees?
      10. Detail bonus and commission plans?

Questions the Buyer Should Ask Themselves

      1. Am I just in this for the money?
      2. Do I really want to do this all day? Am I interested in this industry?
      3. What is the best way to finance this?
      4. Do I feel the Seller is truthful and someone I am comfortable working
        with during the transition?
      5. As I consider this purchase, what is my exit strategy? (It is never too
        early to ask this question.
      6. How much cash am I prepared to pay up front?
      7. Can and do I want to obtain bank or third-party financing? How much
        capital will I need to finance or raise? (Sales Price – Cash Deposit –
        Seller Financing = Capital Needed).
      8. Will current cash flow cover debt service? How much working capital
        does the business need on Day 1?
      9. Why should I buy a business and not just start one from scratch?
      10. Do I want to manage the business full time or operate it as an absentee
        owner? Ho many hours do I want to work a week?
      11. Will my family work in this business? Will they be interested in taking
        the business over one day?
      12. What will I need during due diligence to reassure me that this is a
        good opportunity?
      13. What is my gut telling me about this opportunity? Is the risk in this
        business something I am comfortable managing?
      14. How much money will I need to draw out to business immediately? Can the
        business support that?

This article shares a fairly comprehensive list of items needed in due diligence. Remember, not all items are needed and some things you need may
not be listed.

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