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What Questions Should You Ask Before Buying A Business?

19 Jun What Questions Should You Ask Before Buying A Business?

As the economy is going through some very dramatic and unprecedented changes, in addition to the wave of retiring baby boomers selling a business, it is predicted that there will be an exceptionally large amount of businesses entering the M&A market looking to sell out the position of ownership. As the supply of businesses available for acquisition in the market increases, simple economic principles of supply and demand would suggest that the value of these businesses would decrease thus presenting an opportunity for entrepreneurs, strategic acquisition seekers, private equity groups, and other acquirers to buy up the cash flowing machines at a discount. However, it is important for those inexperienced acquirers to ask themselves a few questions before making an acquisition in the Bellevue, WA market, or any market for that matter :

1.    Is now the time to buy a business based on my current circumstances?

Many of the businesses that end up on the market are the result of business owners who have started a business, and, for one of a myriad of reasons, have had to seek an exit strategy while accepting a significant loss. This could be due to a lack of funding behind the business, lack of family or partnership support, lack of experience, or a lack of commitment. When you are assessing the option of buying a business it is important that you consider your situation and decide what resources you have and how well those resources will hold up when you need to call upon them. Probably the most important is your own personal commitment to the company. There are many business owners who have made things work out because they would not accept anything less.

2.    How long are you willing to go without a vacation?

When you organize the business, it is very likely that you will end up on the top management of the company, at least for the first year. Hopefully by the end of the first year you will have a manager in place that can take the reigns for a short amount of time while you are away on a vacation. Until then, you may be working none stop to ensure the business’s success. Are you willing to go the length of time necessary to ensure these things are in place before stepping away? The success of the business may depend on it.

3.    Do the numbers make sense?

Before committing the amount that you are willing to pay, be sure to do your due diligence on the company and ensure that the revenues, expenses, budgets, and profits all make sense. You don’t want to buy a business just to lose out on a lot of cash. While I often say that such circumstances are the cost of education, it is a lot better if you can learn that before hand.

4.    What other dirty secrets are hiding in this business?

Most businesses have skeletons hiding in the closet, and while most business owners will not lie about them, many won’t mention them either. Remember, it is in their best interest that you don’t find them during the due diligence because it will create the need to negotiate the price down.

When you do find those skeletons hiding it is usually a good idea to wait till the end of the due diligence to bring them up to the owners and renegotiate the selling price. By this time many owners are mentally checked out of the business and are more willing to negotiate a reasonable deal.

5.    What is the business’s reputation?

While most confidentiality agreements will not allow you to ask speak with the customers, it is always a good idea to find out about the reputation of the business. You would not want to buy a business that has a bad name among its customers, at least without receiving a discount.

6.    What is the growth potential?

Figure out what the growth potential is behind the business. If the business does not have a growth plan then put one together yourself. While you are buying the business’s expected cash flows you also want to continue growth and expansion expectations to increase the businesses resell value.

7.    Why do the sellers want out?

There are many different reasons why the business owners would want to sell their business. Make sure you know why they may be looking for a way out and keep your eyes wide open as you move forward toward closing a deal for anything that may be suspicious.

8.    What type of an offer is the seller looking for?

Some seller are looking for an all cash offer that takes them completely out of the business. In such circumstances it is important to consider why the owners are not willing to take a buy out or hold some equity. Are they afraid there will not be anything left of the business in the near future so they are trying to cash out completely? If an owner is willing to take some sort of leveraged buyout or equity in the business after the sale then there may be less to worry about.

9.    What is the business worth to me?

When performing a valuation on the business you will want to consider the current expenditures and determine if you will be able to provide for the business in those aspects at a cheaper rate. Some buyers have the infrastructure to make the acquisition and plug the expenses into the existing model with little additional overhead. If this is applicable to you it will increase the profitability of the business to you and assist you in making a more competitive offer if other buyers are interested in the business.

10. When is the best time to pursue an exit strategy?

What is your exit strategy? How long will you stay with the business? Is this something that you will want to stay with and pass on to your children, or is it a stepping-stone that will lead to a bigger and better opportunity? Whatever your circumstances may be it is important to think about how easily the business will be resold and how you will get out when the time comes. Know your exit strategy.

Troy Jenkins
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