Basic questions to ask buying a business
What are some basic questions to ask buying a business?
Remember, there are two critical things a buyer of a business is looking for and these are cash flow and potential. They may be willing to compromise on almost any other thing but if the cash flow’s not there to provide an income to sustain their family and livelihood, service the debt of the business and include a buffer in case they need time to re-establish upward momentum in the business and the industry the business is in is declining, then it will be a challenge to close the sale.
If the cash flow and potential are good, consider the following 6 questions to help present the business to the market. And a Golden Rule I use when helping buyers and sellers is to put your feet in the shoes of the other party, that is, don’t see things from your perspective, see them from the perspective of the other party.
- Does the business present itself positively and therefore have buyer appeal? We’ve all heard the expression – does it sizzle? A buyer wants to be excited about the business and what it does. Making sure it has plenty of sizzle and presents itself well to the market is very important. In residential real estate it’s called “curb appeal.” Make sure the business presents well and has good “curb appeal.”
- Who is the best buyer of the business? Not every business can be bought by every buyer. Criteria that may exclude a buyer, depending on the business, include technical skill sets or mandatory qualifications.
- How is the neighborhood around the business? If the business is located in an attractive mall or in an upscale area it follows that it will attract a similar clientele. This would obviously be more attractive to a potential buyer. Incidentally, this doesn’t mean the business is worth more, as some sellers expect, it just means if the business is valued and priced correctly it may have a better chance of selling.
- Most sellers can quickly explain what they would do if they had more time. This can be useful talking points between the seller and buyer. Most qualified buyers will be looking for things they can do better if they owned the business. As we said above, potential is critical to a business buyer.
- What is the buyers risk level and how easily can it be quantified? Buying a privately held company comes with a lot of risk; unaudited financial statements, changes to the law that affect the industry the buyer is looking at joining or changes to the tax laws that affect how much money the buyer as the business owner gets to keep, and more. As the seller, you have a lot of business and industry knowledge. Don’t be afraid to share your observations without couching it in terms of guarantees or future expectations of the performance of the business.
- Does the price and terms of the deal pass the “smell test?” One of the services I provide is business valuations as well as machinery and equipment appraisals. After doing all the research to arrive at the final value I always do a “smell test” to make sure the figure arrived at makes sense. If it doesn’t, it means doing more research. The “smell test” or “gut check” is a great way to keep things real.
Buying or selling a business is complicated. It’s generally a series of questions with follow up questions looking for one final yes. It requires patience and stamina as there are so many moving parts.
If you are looking to buy a business, click this link will provide a simple summary of the Many steps to buy a business.
If you have questions or would like more information about buying a business or buying a franchise, feel free to get in touch with me for a quick consultation. We’ll discuss your particular situation, what’s important to you and make a plan for those first few steps.