Buying a business is a huge decision and it’s important to get it right. There’s a lot that goes into the process, but one important step is having a conversation with the seller. In this blog entry, we highlight five questions that you should ask the seller. His or her answers will help you gain a more complete understanding of the business and its value.
- Why Are You Selling Now?
This is a critically important question – and unfortunately you’re not guaranteed to get a straight answer. You need to know why he is selling and whether his reasons will have an influence on your decision to purchase the business. Some business owners sell because they want to retire or perhaps move to a different city or state. Others fear that their business may be on the brink of collapse – and this is a situation you’ll obviously want to avoid, unless the price of the business reflects those concerns. The current market conditions indicate that there are a significant number of “baby-boomers” attempting to retire and, therefore, sell their business.
- How Did You Decide on the Asking Price?
Determining a fair purchase price can be difficult for sellers. Often they set arbitrary figures because they want to net a certain amount in order to move on with the next chapter of their life. Likewise, we have heard of valuations determined by how much the buyer has “put in to the business” (i.e., sunk cost). These are obviously not a good ways to ascertain the value of the business. The purchase price should be backed up with quantitative figures, such as cash flow produced by the business to its owners, the value of equipment, and the value inventory.
- Does the Business Have Policies, Systems, and Procedures in Place that Will Permit the Owner to Transition (Smoothly) to a New Owner?
This is a great question in which you can learn whether or not the business is one that can even be bought or sold. If the business cannot survive or otherwise properly (and profitably) function without its existing owner, then it diminishes the value of the businesses. Typical buyers want a “turnkey operation” that they can step into and start running day after closing (and then pursue additional untapped opportunities). If you discuss these issues with the owner, you can better make decisions as to whether the business is the right one for you to buy.
- Have You Had Any Lawsuits, Or Any Potential Lawsuits?
You do not want to buy a new business and suddenly be saddled with a lawsuit. Ask the seller if there are any current lawsuits, or if any lawsuits are pending. Also, ask about any lawsuits in the past. You want to avoid surprises. Regardless of the answers, you want to make sure that you set the structure of the purchase and sale in a way that insulates you as the new buyer from any of these historic issues.
- What Will the Employees Do After the Sale?
If the business has existing employees, you will need to know what the employees plan to do once the business is sold. You will also need to identify whether there are any “key” employees, without whom the business would struggle to function. Will such key employees be remaining with the business after closing? If not, you it may change the value of the business as going concern. Furthermore, you may need to take precautionary actions to prevent departing employees from soliciting your customers/clients or otherwise unfairly competing against.
Buying a business is a huge decision, and you should not go about it alone. Seeking the counsel of a business attorney will give you new insight into the buying process and will potentially save you from making a costly mistake. If you are considering buying a business, contact us today and let us guide you through the process!