Questions to Ask the Seller of a Business
Have you found a business you dream of owning? Before you draft a letter of intent, there are several important questions to ask the business owner. Some business owners may prefer you to work with their broker. If so, speaking with the broker can be valuable too.
Here are some of the key questions to ask the business owner/business broker before buying a business.
– Why is the owner selling the business?
The seller may be transitioning for several reasons from financial to personal or strategic. Common reasons include retirement, failing health, or new opportunities. However, sometimes the owner may be exiting because of competition, a downturn in the economy, or increased regulation. You will want to find out as much as you can. Understanding this can give you insight into the business. If the business has a solid history and a profitable future the business owner should be able to give you an in-depth explanation for why they are selling and how long they have been preparing to sell.
– What assets and liabilities does the transaction include?
As a buyer, you will want to know what exactly is being included in the transaction. Ask what liabilities and assets are included in the purchase price. Is it an asset purchase or stock purchase? Is there real estate involved? Are there any additional assets in other locations? Can you buy the business without the assets or real estate? Will the sale pass on the debts and liabilities of the business? Each of these items will impact the purchase price.
– How did the seller arrive at the asking price?
Often, sellers base their asking price on arbitrary factors. This can include how much money they want to move on with their life. It is important to find out what quantitative information they have that backs up the asking price.
If you move ahead with the purchase, you will want to obtain your own independent business valuation. Peak Business Valuation, business appraiser Texas, specializes in providing business valuations for small businesses. As part of the due diligence process, you will want to obtain a business valuation to help verify financials and determine the fair market value of the business.
However, it is worth understanding more about how the seller determined the asking price. Specifically, what valuation methods they used or if it was a shot in the dark from themselves or their broker. Common valuation methods include the asset approach, income approach, and market approach.
– What outcomes is the seller looking for?
Many buyers assume a seller is looking for the best price. In some cases, though, this may not be true. Some sellers wish to see the business grow and develop and carry on the legacy they have built. Other sellers may be looking for a buyer who wishes to continue to provide stable employment for the current team. There are several outcomes a seller may be looking for other than price. As such, the terms and conditions of the final offer may be just as important if not more. Be sure to ask what the seller is looking for in the transaction.
– Is the owner willing to stay on for a transition period?
Having the seller stay on for a period after the transaction can help with the transition. It can be extremely helpful for the buyer to receive training and transition key clients and employees. A transition period is also useful if you are new to the industry, early in your career as a boss, or want some on-the-job training. It may be worth it to include an incentive for the current owner to stay on to help transition the business. Details of the transition period should be included in the initial letter of intent as well as after negotiations in the final purchase offer.
– What has the seller’s role in the business been?
As a new owner, you will want to know what role the seller plays in the business. Is the owner passive or actively involved in the day-to-day operations of the business? Be sure to ask how many hours a week the current owner works in the business. Does the business have a strong management team that runs the business? Asking if they take holidays and how they manage vacation can also clarify the time commitment and involvement it will take to run the business.
– Who are the business’s key customers, suppliers, and employees?
This is one of the most important questions. Understanding who these key players are can be a large factor in the continued success of the business. You want to be sure the customers are not dependent on the owner or a key employee – contracts can be helpful for this. It can also help you as a buyer to understand the level of owner dependence in the company.
If the business relies on one or two customers or suppliers there is increased risk. Similarly, if relationships are tied to the owner or key employee, they may not continue doing business with a change in ownership. Having a transition period for the seller can help eliminate some of the risks with key customers, suppliers, and employees.
– Will the owner consider seller-financing? If so, how much?
How you plan to finance the business purchase, is important to consider prior to making an offer. Specifically, you will want to know if seller-financing is available and how much. Many loans including SBA loans require down payments. Seller-financing can help supplement the down payment for a long-term loan.
– Is the seller willing to sign a non-compete agreement?
Before signing the final offer, you want to be sure the buyer does not have intentions to either start or join a competing company. Be sure to ask the seller if they are willing to sign a non-compete agreement for a specific period or a specific location.
– What are the biggest challenges the business is experiencing?
The current business owner will be aware and open about what challenges the business is experiencing. Whether this is the current economic climate, market, competition, etc. It can also be helpful to ask questions about strategies the seller has used or would use to stay ahead of these challenges.
The goal is to get to know as much about the business owner and the business as possible. Asking questions to the seller is important to a successful business purchase. You should understand their rationale for the asking price and valuation. As well as understand what terms and conditions the seller is requesting.
As a buyer, you do not want to go into a transaction blindly or waste time putting numerous offers on the table. Speaking directly with the business owner can give you the best sense of how the business is operating and what role you will play as the new owner.
Asking the right questions is key to buying a business and obtaining essential information about the business. Peak Business Valuation, business appraiser Texas, is here to be a partner with individuals looking to buy or sell a business. We provide business valuations to help understand the fair market value of a business. A business valuation can also give you insight into the strengths and weaknesses of the business and opportunities to grow it. Questions are always welcome! Please reach out via email or by scheduling your free consultation below!
Post Initial Letter of Intent
Once you make an initial letter of intent, you will want a team of professionals to help you perform due diligence. Due diligence is important to check the facts and figures and give you a better feel for the business. Doing so can help you decide if it is a good fit for you.
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