What Questions To Ask When Buying A Business?
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Considering buying an existing business?
That could be a smart decision. After all, buying an established business will provide you with immediate cash flow.
Instead of starting from scratch, you’ll benefit from an existing customer base and a proven business model. Besides, the products or services will have already been market tested and all the groundwork will have been done meaning the business will already have procedures and strategic plans in place.
But while buying an existing business might seem easier than starting your own, failing to take the right preliminary steps could lead to a poorly run operation.
So, to help you avoid costly mistakes and make an informed decision, we’ve listed below five important questions to ask yourself and the business owner before buying an existing business.
5 Questions To Ask Before Buying A Business
Why Do You Want To Buy This Business?
Running a business can be particularly challenging and you need to ensure you’re buying this specific company for the right reasons. You’re going to spend a lot of time, effort, and money on this venture so make sure you’re passionate about the company and you see it as a great investment with potential.
Also, think about what the day-to-day operations entail. For instance, if you’re buying a beauty salon, will you have the patience to deal with angry, rude, or unsatisfied customers?
Do I Have The Skills Required?
Even though you can afford to buy a specific business, do you have the skills required to run it successfully?
After all, the idea is to grow it and increase your bottom line and this takes a particular skillset. Not only do you need to take into account your expertise in the industry you’re considering investing in, but you also need to ensure you have the management and leadership skills necessary to run a business.
60% of Australian small businesses fail within three years of inception so it’s important to be realistic about your abilities before committing.
Why Are You Selling The Business?
Once you’ve determined your motivations for buying a specific business and whether you possess the skills required to run it successfully, time to talk to the owner. And one of the first questions should be about their decision to sell.
Be wary of generic answers such as ‘’I want to retire’’ or ‘’I want time to travel’’. Even though it can be true, it could also very well be a lie. It’s your responsibility as a buyer to dig deeper to uncover the genuine reason why the owner wants to sell. This is important because it can give you leverage during the negotiations but also help you uncover red flags and understand what to expect.
For instance, if the owner wants to sell because of burnout, there’s room for you to reduce the workload by restructuring the organisation and outsourcing or automating some of the work. However, if they’re selling because the company is unprofitable, you need to review the financial situation in detail and assess whether or not you can turn things around based on your industry experience.
Do I Need Any Licenses Or Permits?
Depending on the type of business you’re considering purchasing, you might need to carry a license, have a special permit or certifications to comply with the law.
Doing your due diligence will prevent any bad surprises once ownership is transferred to you.
So, some of the questions you need to ask the business owner are whether the company holds all the correct licenses or permits, whether they are up-to-date and whether they can be transferred over to you. It's also here where you want to ask the existing business owner if their premises is actually permitted to trade in that location - this is often looked and council zoning could give you a headache down the track!
How Much Profit Have You Made Over Time?
This is a critical question because it will help you determine whether this business is worth buying. Be extremely diligent when reviewing the books and don’t let yourself be fooled by gross revenue only. For instance, the gross revenue could be growing every year but the margin could be decreasing which could indicate high overheads and financial mismanagement.
Look at all the reports line by line and hire an expert to help you review financial statements and reports in detail. There are ways you can reduce business expenses, so if it's just a cash flow vs profit issue, this is something you should know beforehand, but if it's a straight lack of profit or lack of potential profit, you should definitely be cautious.
No stone should be left unturned!
Protect Your New Business With Business Insurance
You could do all the research in the world and buy a successful business and still go bankrupt.
Because if you don’t protect your new company against business risks such as a customer injuring themselves on your premises, you could face tremendous financial pressure and have to close shop.
So, jump on our free instant quote generator, where you can get an estimate on market-leading insurance in seconds.
Simply enter your occupation and expected revenue to get started.