The Importance Of Asking The Right Question Before Buying A Business

Desy Papper

By Trent Lee, the recipient of the award as the #1 business broker in the country by the International Business Broker Association (IBBA). getty I will always remember a lesson from a Harvard professor about the importance of asking the right questions. He told a story of a religious group […]

By Trent Lee, the recipient of the award as the #1 business broker in the country by the International Business Broker Association (IBBA).

I will always remember a lesson from a Harvard professor about the importance of asking the right questions. He told a story of a religious group that met each week and how one of the attending members was responsible for taking the meeting attendance. Professor Clayton Christensen stated the individual who was dutifully fulfilling his responsibility was asking the wrong question. The question should not be how many attended services that day but rather “Who didn’t come today?” and “When was the last time we saw them?”

How is this relevant to buying a business? The concept is the same and applicable in so many aspects of life, including buying your next business. Asking the right questions makes the decision of moving forward with the acquisition actually quite simple and straightforward.

The following are 15 questions to ask the seller before you buy your next business.

Why did you get into the business in the first place, and what excited you about it?

This will give you a very good indication of the seller’s initial hopes and dreams, as well as the opportunity they say originally existed in the marketplace when it was created.

What is your day-to-day role in the company?

This is important as it will help you determine how hands-on or hands-off you can be with daily operational responsibilities.

What would happen if you took 30 days off from the company without any advance warning to the employees?

This is a very telling question, depending on whether the seller addresses it honestly and in detail. Their answer should give you a very solid indication of how much the business sales, operations and service are dependent on the seller and how well trained the staff is, as well as the level of competence and trustworthiness you can expect from the employees.

Why does your customer buy from you rather than your competitors?

This will help you determine what the seller’s unique position in the market is, if any.

How long have your employees been with you, and why do they stay?

For most small businesses, employees are a vital part of what you are taking over. If they are loyal to the business culture and product or service vs. loyal to the owner individually, the answer to that question directly impacts your offer and the transition process.

What is wrong with the business and needs time and attention to fix or improve?

This is one of my favorite questions. If you can establish trust with the seller and get an honest answer, this will help you see what areas are causing the seller grief and what you will likely need to address when you take over.

How much working capital do I need, and how did you determine the amount?

It is important to plan for sufficient working capital, as you’ll need capital for the acquisition, capital expenditures and working capital. Understanding how the seller calculated their working capital is important in order to avoid coming up short on needed funds.

What concerns do you have about the future of the industry?

As a business broker, this question has been very revealing over the years. Sometimes owners know things that the public doesn’t know. They could be positive or negative insights but very impactful to the business either way.

What mistakes have you made, and how can I avoid them?

I like to hear from the seller on the mistakes they made over the years and how they’ve corrected them. You are, after all, purchasing the business where they made these very same mistakes. You’ll be reviewing or working with the process or procedures they’ve put in place to correct those mistakes, and you’ll need to understand what happened so history doesn’t repeat itself.

Do your financials reflect all your income and expenses, or is there any off-the-books money I need to be aware of?

Hopefully, the answer is that there is no hidden cash. If there is, this should not be factored into your valuation.

What are your biggest challenges right now?

This could be your biggest area of focus and improvement.

If you can’t sell the business, what will you do?

This helps reveal how desperate the seller is and their true motivation for selling.

What systems, processes and procedures are documented within the business?

This will help you determine how difficult training and transitioning will be when you take over.

What would your growth plan be if instead of selling the company, your goal was to double it in five years?

While you may have some idea to grow the business, the seller may also have insight you haven’t thought of.

What does your customer base look like?

There is real value to the customer database and real opportunities to monetize it. You’ll need to get details about the customer base and how often the seller communicates with them because this is a vital aspect of what you are acquiring from the seller.

None of these questions are meant to replace your due diligence, both legal and financial research. Those are a totally different set of questions and vital to the business buying process. These questions are primarily intended to be asked of the seller directly to get to know them and the business and help you get a better idea of the big picture before moving forward with the acquisition.

You’ll need the help of a business broker, CPA and attorney or escrow closing agent to help you through the details to complete the transaction.

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