The Real Questions to Ask BEFORE Buying a Business

Are you considering taking the leap into business ownership and becoming a business owner? Whether you're looking to escape the corporate world or expand your entrepreneurial portfolio, buying a business can be an exciting yet daunting prospect. Before you dive into conversations with a business broker or a current business owner, there are crucial questions you need to ask yourself. In this comprehensive guide, we'll explore the essential "Questions to Ask BEFORE Buying a Business" to ensure you're fully prepared for this significant decision. We've separately talked about the questions to ask when buying a business, but this article is focused the the initial steps before you get there.

Why Am I Considering Buying a Business?

Before you start researching potential businesses for sale, it's crucial to understand your motivations. Are you:

• Looking to quit your corporate job for a more rewarding role?

• Aiming to build equity in a valuable company?

• Expanding your existing venture into new markets?

• Converting a passion or hobby into a full-time earning opportunity?

Take time to reflect on your strengths, personal circumstances, preferred location, and the maximum time and capital you can invest in a business venture. This self-assessment will help guide your search and decision-making process. Consider creating a list of your personal and professional goals. How does owning a business align with these objectives? Are you seeking more control over your time, higher income potential, or the satisfaction of building something of your own? Understanding your motivations will help you stay focused throughout the buying process and beyond.

Why Buy an Existing Business Instead of Starting My Own?

Starting a new business from scratch can be incredibly challenging. According to the Small Business Administration, about 90% of startups fail in their first year. Buying an existing business offers several advantages:

• Established customer base

• Existing operational processes

• Current employees with experience

• Proven cash flow

• Established brand recognition

• Existing relationships with suppliers and vendors

• Historical financial data for analysis

However, it's important to note that buying a company isn't without risks. You'll need to leverage your entrepreneurial and administrative skills, whether starting from scratch or taking over an existing operation. Remember, even an existing business will require your unique vision and leadership to grow and thrive. When considering buying vs. starting, think about the following:

• Your tolerance for risk

• Your ability to innovate and create new systems

• The time you're willing to invest in building a business from the ground up

• Your desire to put your own stamp on a business vs. taking over an established model

How Will I Finance the Purchase, and How Much Capital Do I Have to Invest?

Financing is a critical aspect of business buying. Consider these options:

• Personal savings

• Bank loans

• Investor capital

• Seller financing

• SBA loans

• Home equity loans

• 401(k) business financing

Be realistic about how much capital you have available and what financing options are feasible for you. This will help narrow down your search to businesses within your budget, weed out those with an asking price that's too high and determine if you can close with an all cash deal or will nee financing. When assessing your financial readiness, consider:

• Your personal credit score and financial history

• The amount of liquid assets you can commit to the purchase

• Your ability to secure additional financing if needed to fund working capital or a higher asking price

• The potential return on investment and how long it might take to recoup your initial investment

It's also wise to consult with a financial advisor or accountant to understand the tax implications of different financing methods and business structures.

Do I Have the Necessary Skills to Run This Type of Business?

Assess your skills and experience in relation to the businesses you're considering. If the current owner is heavily involved in day-to-day operations, ask yourself:

• Do I have the skills to perform that role?

• Do I want to perform that role?

• What aspects of running this business am I most excited about?

• What areas might I need additional training or support in?

If your skills don't align with the business's needs, you may need to consider hiring key employees or looking for a different opportunity. Consider creating a skills inventory:

• List your strongest skills and areas of expertise

• Identify skills you'd like to develop

• Think about how your skills align with different types of businesses

• Consider what complementary skills you might need in a business partner or key employees

Remember, you don't need to be an expert in every aspect of the business, but you should have a solid foundation and be willing to learn.

Is There Long-Term Demand for the Business's Products or Services?

Before investing in a business, research the industry and market trends. Consider:

• Is the industry growing or declining?

• Are the products or services likely to be in demand for years to come?

• Is there potential for innovation or expansion?

• How competitive is the market?

• Are there emerging technologies or trends that could disrupt the industry?

A business with a strong market position and potential for growth is more likely to be a good investment. To assess long-term demand:

• Conduct market research on industry trends

• Analyze the business's customer base and their buying patterns

• Look at demographic trends that might affect demand

• Consider economic factors that could impact the business

• Evaluate the business's competitive advantage and how sustainable it is

Don't just focus on current performance – try to envision where the business could be in 5-10 years.

How Will I Determine the Business's Value?

Valuing a business is a complex process that involves analyzing financial statements, evaluating the business plan, assessing assets, and considering market conditions. You have several options:

• Calculate the value yourself using various valuation methods

• Hire a professional business appraiser

• Use a combination of both approaches

Key factors in valuing a business include:

• Financial performance (revenue, profits, cash flow)

• Assets (tangible and intangible)

• Market conditions and industry trends

• Growth potential

• Customer base and relationships

• Intellectual property

• Brand value and reputation

To get started, watch our free masterclass: How to Value a Business and Negotiate the Best Price ...Without Complex Excel Models, a Degree in Finance or Access to an Investment Banker. This will give you insights into The Valuation Formula, our step-by-step program that teaches you how to accurately value a business and negotiate effectively.

What's My Exit Strategy?

Even before investing in a business, it's essential to have an exit in mind. Consider:

• How long do you plan to own the business?

• Do you want to grow it and sell for a profit, or maintain it as a long-term income source?

• What potential exit options exist in this industry?

• Are there opportunities for expansion or franchising?

• Could the business be passed down to family members?

Having a clear exit strategy will help guide your decisions and ensure you're working towards your long-term goals. When developing your strategy, think about:

• Your personal and financial goals

• The potential for business growth and value appreciation

• Market trends that might affect future sale opportunities

• Potential buyers (competitors, employees, family members)

• How much involvement you want to have in the business long-term

Remember, your exit strategy may evolve over time, but having an initial plan will help you make strategic decisions from day one.

Am I Prepared for the Challenges of Business Ownership?

Owning a business can be rewarding, but it also comes with significant challenges. Ask yourself:

• Am I ready for the time commitment required?

• Can I handle the stress and uncertainty of business ownership?

• Do I have a support system in place?

• Am I comfortable with financial risk?

• How will business ownership impact my personal life?

Be honest with yourself about your readiness for the demands of entrepreneurship. Consider talking to other owners about their experiences to get a realistic picture of what to expect.

What Due Diligence Will I Need to Perform Before Becoming an Owner?

Once you've identified a potential business to buy, thorough due diligence is crucial. Obtain a due diligence checklist to ensure you don't overlook any critical aspects of the business. Consider engaging professionals like accountants and lawyers to assist with this process. You'll need to investigate:

• Financial records and tax returns

• Legal documents and contracts

• Employee information

• Customer and supplier relationships

• Business operations and processes

• Market position and competition

• Regulatory compliance

How Will the Business Venture Impact My Personal Life?

Investing in a business is not just a financial decision – it can have significant impacts on your personal life. Consider:

• How will business ownership affect your work-life balance?

• Are you prepared for potential financial stress while you make the business successful?

• How will your family be impacted?

• Are you ready to be the primary decision-maker?

• How will you handle the emotional aspects of business ownership?

Discuss these considerations with your family and trusted advisors to ensure you're fully prepared for the lifestyle changes that come with business ownership.

Frequently Asked Questions:

What are the most important questions to ask when buying a small business?

Key questions include inquiries about financial performance, customer base, competition, legal issues, and reasons for selling. Our detailed guide, 32 Essential Questions to Ask When Buying a Business, covers this topic in-depth, covering what you want to know about existing customers and employees.

What legal questions should I ask when investing in a business?

Important legal questions include inquiries about outstanding lawsuits, regulatory compliance, intellectual property rights, and employment contracts. Consult with a business attorney for a comprehensive legal review of the legal matters at hand.

How do I negotiate to buy a business?

Effective negotiation involves thorough preparation, understanding the business's value, and being clear about your goals. Our program, The Valuation Formula, provides in-depth strategies for successful negotiations.

How can I assess the business's financial health?

Review financial statements (balance sheets and business activity statements), the last income tax return, and cash flow projections. Look for trends in revenue and profitability, and assess the business's debt and assets. Consider working with accounting professionals to get a clear picture of the business's financial situation, current cash flow and how much working capital it has.

What red flags should I look out for when buying a biz?

Watch for declining sales, high employee turnover, outdated technology or equipment, overreliance on a few key customers, and any legal or regulatory issues (read pending lawsuits or lack of relevant permits). Also, be wary if the current owner is reluctant to provide detailed information or if the reason for selling seems unclear or suspicious.

Next Steps:

Now that you understand the crucial questions to ask BEFORE buying a business, you're better prepared to start your search. Remember, these questions are different from questions to ask WHEN buying a business.

Grab the checklist with all the questions to ask when buying a business in our free guide, Ultimate Buy-Side Transaction Starter Guide.

You'll get the complete list of everything to request in due diligence, a checklist of the essential questions to ask before buying a business, and the essential questions to ask when buying a business.