5 Essential Questions to Ask When Buying a Business
Searching out companies for sale can be as exciting as looking for a new home. But if it also feels nerve-racking, we empathize because we’ve been in your shoes! Your decision may have lifelong consequences. Imagine making a disastrous choice and losing all the money you invested or hating your new venture.
When you follow our 3 Tips for Choosing the Best Business to Buy and get a thorough education in how to buy a business, you set yourself up to make smart choices throughout the buying process. But at the moment you’re assessing an existing business, do you know what to look for?
Here are five questions to ask when buying a business, to evaluate whether the opportunity is right for you.
Questions to Ask When Buying a Business
Question 1: Am I a good fit?
Business tycoon Warren Buffet never invested in a business he didn’t understand. Why should you? If you can’t wrap your head around the business’s products and services, its customers, and its business model, we suggest you continue your search.
Do you like the business? And would you be proud to own it? If your gut says yes, you might be a good fit.
Did You Know...
The "Right Fit" buyer is often more desirable than a high price buyer because there is a higher probability that the deal will actually close.
Question 2: Can I afford the business?
Will you be able to secure the cash you’ll need to purchase and transition the business?
Consider the down payment, the transaction amount that will be financed (e.g., by a bank or by the seller), the working capital you’ll need in the first few months of operation, and any future payouts you’ll need to make to the seller.
Question 3: Can the business afford me?
Obtain a complete set of financial statements that are produced consistently and professionally, are free of red flags (e.g., an unexplained change in year-over-year numbers), and exclude sales tax from the revenue numbers.
“Be extra cautious if the owner isn’t working with a business broker,” said Vincent Côté, Broker and CEO at Transitions Business Brokers. “For a sale by owner, there’s no telling what shape their financial statements will be in.”
We recommend you do some calculations to normalize the statements. And ask yourself whether you’ll get enough cash flow to pay down debt, compensate yourself, and invest in future growth.
Question 4: Is the price fair?
Only you can decide! Perhaps you see hidden value in the company or a promising growth opportunity. On the other hand, maybe you see hidden risks.
If you understand how small businesses are priced, have analyzed the financials, and feel intuitively that the deal is fair, you may want to proceed.
Question 5: Can I foresee future viability?
Do you have a vision? What could you do with this business? For example, maybe you foresee a name change, a relocation, or expansion into new markets.
Recast the financials. “What do you hope to earn, and to spend, in the future?” said Côté. “Budget that out over 10 years or so.” When you go through the Transitions Business Brokers Business Buyer’s Brilliance program, you’ll get detailed information and templates to help you estimate future cash flows.
If your calculations project a future net profit once you've paid your debt and yourself, you may be looking at a viable business.
Whether you're in Toronto, in the GTA, or elsewhere in Ontario, it's important to know the right questions to ask when buying a business.
Master our exclusive 5-F framework to get a firm understanding of the factors to consider before making a purchase offer. Start getting educated today!