The first question you ask as a buyer is not directed toward the seller. The first question should be answered by you the buyer. The question is: Do I see myself running the business I’m thinking of buying? Along with other associated questions like: Am I really an employer, or an employee? Do I have the intestinal fortitude to withstand the gut-wrenching day-to-day interplay among employees, clients and vendors? Am I sufficiently capitalized to be successful long-term?
Having positively answered the above, never rely solely on the questions that come to your mind. Surround yourself with a business buyer team: a C.P.A. and attorney are minimum; having a financial advisor and lender is normally necessary.
Here is a short list of questions addressed to the seller, to which you should get good answers:
- Why are you selling? Retirement used to be the main reason businesses were sold. Now, burnout seems to be most prevalent. Definitely make sure the seller has plans for post business ownership, or he/she may not be fully committed to the sale.
- What do you do on a day-to-day basis? Find out how many hours the seller is working, and what a typical business day is. Also, ask if there are special licenses the seller has obtained that you will need either immediately or eventually.
- Are you willing to train me for 60 days (or longer)? The training should be included in the acquisition price. Specifying a set number of hours of training over a longer period (like a year) will allow for future questions or emergency help.
- Do any of your clients represent more than 10% of your revenue? If clients representing over 10% are lost, the profitability of the business could be greatly diminished. It might be worth looking at a client list for the past three years to see what kind of client concentration and turnover takes place.
- Who are your competitors? Are they larger or smaller than the business you are acquiring? Ask about the competitor’s strengths and weaknesses.
- How can I build the business to be more profitable? If the seller has no clue how to build the business, he/she ought to get out of the industry. As the buyer however, you need to know if there is a systemic problem within the industry.
- Are you able to take time off? Who is in charge while you are gone? If the business is tied directly to day-to-day owner management, you may not be able to plan family vacations.
- What are the background, experience and salary of your supervisors or managers? Hopefully, these individuals will allow you to have some personal and family freedom. It’s also important to see if the business is “top” heavy.
- What percentage of the sale of the business are you willing to finance? The minimum should be 10%. Most sellers want to minimize the carry back, but sellers should all realize buyers want them to have some “skin” in the game.
- Who prepares your financials and tax returns? Are your financials compiled, reviewed or audited? Financials should be at least compiled by an outside CPA. Reviewed financials are better, and audited statements are the highest level.
Answers to these questions and others will establish whether or not you feel you can trust the seller. If you trust the seller, and the seller trusts you the buyer, few things will stand in the way of consummating a transaction.