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Small Business

What Questions to Ask When Buying a Business

min read

At some point during a 9-5 or graveyard shift, you may have wondered how to run a successful small business and be your own boss. It’s a worthy thought. And one that bears a lot of consideration before you take the plunge.

Do everything well— marketing, sales, finance, operations, customer service— and reap the benefits of business ownership: independence, self-sufficiency, wealth creation, etc. Make a few missteps in any one of these areas, and the consequences can be devastating: a reduction in income, unmanageable debt, and a drain on your personal well-being.

Your livelihood is a marathon, not a sprint, so you must analyze the long-term risks along with the rewards. Before you make a firm commitment, you’ll want to ponder all the prospective peaks and valleys of business ownership.

First, Ask Yourself Some Questions

  • Are you willing to commit the time it takes to be successful? You may put in your eight hours and leave the frustrations of the job onsite. However, the first year of business will require many more hours than the 40 you may currently be working.
  • Do you have the financial means to live without a paycheck until revenue starts flowing? You’ll need to rely on savings for living expenses until you acquire some customers and generate adequate sales. Some lifestyle sacrifices may be necessary until you reach your goals.
  • Can you excel at sales, production, service, and all the necessary skills it takes to run a thriving business? Business owners wear a lot of hats. You’ll need to multi-task and perform many duties well or delegate those crucial tasks to a partner or key employee.

Some companies are built from the ground up,  and others are acquired. In either case, you’ll need to perform extensive due diligence.

Buying an existing business is a lot like buying a used car— with many more dollars at stake. You’ll want to know everything about the purchase before you pull the trigger. Thus, after you’ve interviewed yourself, it’s time to ask questions of the existing small business owner.

Then, Ask the Seller Many Questions

How did you arrive at the asking price?

You’ll need to have a good understanding of business valuation, and you may want to tap the expertise of an accountant or consultant.

Many businesses set price as a multiple of revenue or an asset-based formula. If a company pulls in $250,000 in revenue, the asking price may range anywhere from 2-5 times that number, for example. Some sellers may arrive at market value and recent comparable sales in the region may validate the asking price.

Why are you selling?

Some owners may liquidate a business because there simply is no one in the family or organization interested in succeeding them.

And quite frankly, most everyone wants to either retire or try something new. Beware the converse, though. The need to sell may stem from an outmoded product, depleted sales or insurmountable debt, and you’ll need to know that before going in or taking a pass on the purchase.

How does your track record look?

No business runs without a few bumps and bruises.

More importantly, you need to ask whether there are major issues forcing the sale. A valued customer may have recently left the fold or poor customer service may have sullied the company’s reputation. These are circumstances that may not show up on a balance sheet but will have an impact on a new owner.

You may need to query customers, vendors or suppliers to paint a complete picture of the business condition.

Is there debt on the books?

It’s rare that a business will use cash reserves to continually meet all its obligations.

Most companies regularly borrow to finance operations. In an asset sale, for instance, you should have the choice to exclude those liabilities from the purchase or take them on. If you plan to assume the debt as part of the sales agreement, it is prudent to negotiate a lower asking price based on the additional risk you’re incurring.

How is the business structured?

Corporations need to file articles of incorporation that should be available for review from the state where the entity does business.

Reviewing these documents should be easy enough, and here’s where legal advice is advisable. Sole proprietorship or partnership arrangements may be murky in terms of official documentation. In that case, the existence of a silent partner agreement or undisclosed investor stake could drive up the asking price.

It’s also a good idea to check whether or not the company has a business insurance plan set up that you can continue to pay into. If not, arranging insurance for your new entity is an important asset to stay legally protected.

Will you sign a non-compete agreement?

Everyone’s reasons vary when selling a business.

Some owners may just want to move on but others might have ulterior motives that could negatively affect your new venture. Many exiting entrepreneurs may look to work or consult for another firm in the same industry, and that move could put a dent in projected revenues.

If competing with you isn’t in the cards, then signing a non-compete agreement shouldn’t be a problem for the seller.

Final Thoughts

Buying an existing business is a huge decision and one that can’t be taken lightly.

With some expertise, grit, and determination, you’ll find there’s potentially a lot to gain personally and financially by hanging your own shingle. But first, do your homework. You’re not alone in your pursuit, and that can work to your advantage.

More than 10,000 businesses changed hands in 2018, so there is a lot of real-world knowledge out there to guide you on your journey. That trek may be a long and arduous one but worthwhile achievements never come easy. At Next Insurance, we’ve assisted numerous business owners with pursuing their dreams, and we’re here to help you get there as well.

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