Buying a business is a big decision, and you need to know what you're getting into before you make a business acquisition. There are many questions to ask yourself and the seller of the business before you decide to buy a company. Ask great questions about your business and you'll get answers that help you avoid pitfalls and maximize profits. You'll learn what works and what doesn't when running your business.
Buying a business requires careful consideration. You want to make sure that it makes sense for you financially. Crucially, you need to check that the business is actually worthwhile at the price that the seller wants for it and that you‘ll be able to generate revenue long after the sale has been completed.
Firstly, in this post, we will cover the questions you should ask yourself, and then dig into the questions you should ask the seller of the business, as well as other miscellaneous questions. While these questions won't cover everything you should ask, they will give you a head start.
Asking yourself this helps you understand why you're doing something. Running a business is difficult, so you want to be sure you're doing it for the right reason.
Running a business is challenging. It's good to understand what strengths you can bring to this business, and where you can add value. If you don't have the skills yet, maybe you can leverage your network to bring on executives that do have experience.
"The sole purpose of strategic planning is to enable the company to gain, as effectively as possible, a sustainable edge over its competitors" -Kenichi Ohmae
This is one of the most important questions you can ask yourself because you will need to show this plan to potential lenders and investors. Without a plan of attack, you will not be able to sell your vision. When buying a business you need to have an overarching strategy for acquiring the company. You should be asking yourself how you can improve the target company's performance. Some ways of doing this include replacing current management with more skilled individuals, reducing operating margins, and consolidating companies in your industry (acquiring your competitors) using the strategic synergies of the target company you want to acquire.
You always want to ensure you have the end in mind when buying a business. Not all exit strategies mean a sale of the business. Some exit strategies would be maintaining the profitability of the company to hand down to your family, or increasing the profitability of the company so you can sell it at a higher premium. Another common strategy is to refinance the debt so you can acquire other businesses and do roll-ups.
There are various ways to finance a business acquisition. Some methods of financing a business are; seller financing, bank loans, asset-based loans, and money from friends, family, or institutional investors.
Understanding why a business owner wants to sell their business is important when negotiating and positioning yourself as a potential buyer. You need to know what motivates them to want to sell. This information will help you craft an attractive offer.
The amount of time that the owner has owned the business is important to know, and if there were previous owners before them. If the company is over ten years old it is a good sign that the business has developed a reputation and a customer base that you can tap into.
You should also get a feel for how much time the owner spends working in the business. If the owner is working every day in the business and needs to be actively engaged in the day-to-day, then you will need to figure out if you want to take that role and be just as actively engaged or if you can hire someone on to take his role.
If this is your first time buying a business, it would be convenient to know that the owner is willing to stay on for a set amount of time to help ease the transition and offer support during this critical period. It is also a good sign that the owner is willing to still offer support because it shows that he cares about the legacy of his business, and wants to help ensure you will steward the business well.
This is important to know because most business owners will over justify the price of their business. This is understandable because of the amount of hard work, blood, sweat, and tears that went into building it. But the simple matter is, you can not put a premium on that. You need to see through the weeds and get to a suitable valuation that you can purchase the company.
Seller financing is advantageous to the seller and the buyer for many reasons. It benefits both parties because it allows the seller to continue to have a stream of income over an extended period of time, and allows the seller to save in capital gains tax savings over time. Seller financing also shows that the seller still believes in the long-term success of the company. The benefit to the buyer is that it allows him to minimize the amount of capital he needs to put down, and he will also be able to have more flexibility in negotiating the interest rate on the promissory note.
If the owner is not paying himself, then the business is most likely not profitable.
This usually applies to smaller businesses. But if you are dealing with a case where the success of the brand and company would collapse if the owner left that is a huge red flag.
Unless your strategy is buying distressed companies and turning them around, then you want revenue to be in an uptrend.
Make sure to get year-end financial statements for the past three years including the (balance sheets, income statements, and cash flow statements)
If you decide to proceed with the business transaction, make sure that the seller settles all liens before you take over the business.
If there is an ongoing lawsuit you should know what it is about. If the company had one in the past you should know what the outcome was.
One way to figure this out during the due diligence phase is to call the customers and ask them what they like about the business. You can also call the vendors/suppliers and anybody else the business has had dealings with. Also, make sure to talk with the employees of the company. You should also check the social media sites and google reviews of the company.
You will usually know the answer to this question when you are in the first stages of identifying which industries you want to pursue businesses acquisition in. (you can learn more on business buying steps here) Let's say hypothetically you want to get into the Armored Vehicle Manufacturing Industry; the first step in your industry search would be to get a big picture view of of the industry (like scouting out the battlefield before the battle). You should look at the key statistics for the industry like the CAGR (compound annual growth rate), industry revenue, industry profit, federal funding for defense, competitive landscape, etc.
Also important to understand how well the industry you are getting into performs during a recession.
While this article didn't cover every key question that a business buyer should ask, it is at least a list of questions that you will find helpful in your preliminary search and diligence process.
Here at iGOTHAM, we understand that the process of buying a business is time-consuming. As advisors and principle investors we align our interests with independent sponsors, private equity firms, and family offices to help accelerate deal flow.
At iGOTHAM we have tools to help. For example, we have categorized 343 industries by historic growth rate and profit margin. If you want to learn more about the questions you should ask when buying a business you can get access to our private chrome extension which has a list of more questions you should ask when buying a business, and tools that investors can use to complete a business acquisition.
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