Buying A Business Ask Good Questions
As a consumer you've probably purchased big-ticket items before, like cars, houses, a major league baseball team (just kidding about the baseball team). So now you're planning to buy a business and you're thinking, " Hey, I've made a few big purchases before, this can't be all that different, right?" WRONG!!! As Mark Twain would say, the difference between making a large consumer purchase and buying a business, even a little business, is like the difference between lightning and a lightning bug.
A car is a commodity, and only to a lesser degree, so is a house. That means if this one doesn't fit your eye, your budget, or your requirements, there's probably one around the corner that will work.
A business is more than metal, rubber, and real estate. It's inventory and fixtures, location and market penetration, customer lists and accounts receivable, accounts payable and vendors, experienced management and qualified employees. And a small business is one more thing: it's someone's life.
Even if there is more than one business like the one you're thinking of buying in your marketplace, relatively speaking, there aren't many. But more importantly, there probably aren't that many for sale at any one time.
All of this results in making EVERY sale of a business a TOTALLY UNIQUE transaction, which is the opposite of a commodity. NOW how much do you know about buying a business?!
It's not possible to completely educate you in one short article about how to buy a business. What I want to accomplish here is to introduce you to some of the questions that will help you get started. During the process of buying a business you will actually ask about a million questions, but these are some of the key ones.
Ten Important Questions To Ask A Business Seller
Russell Brown is our Brain Trust's business broker expert. He wrote the book on buying and selling a business (literally, see below), and is our go-to-guy on this subject. Here are 10 questions that Russ has discussed with me on The Small Business Advocate Show.
Question 1: If you don't mind my asking, why are you selling?
This is not an abrupt or inappropriate question at all, as long as you work it in at the right time. Regardless of the answer, divorce, retirement, whatever, it's information that may contribute to your decision about whether to buy, and if so, how much to pay.
The best reason is that the owner wants to retire and doesn't have children who want to be in the business. The one to be careful of is someone who is relatively young, and says he just want to do something else. One cue to look for in this answer is how motivated the seller is to sell.
Question 2: Can I see your financial statements for the past three years?
Russ says this is the most important question because when you buy an existing business, you are buying an income stream. You need these numbers so you can recast them based on how you will run the company. You might pay yourself differently than the current owner does. You might have more expenses than the current operation, or you might have less. But won't know any of that until you see how the company has been operating in the past.
If the seller won't let you see the financials, either he doesn't have any, he doesn't want you to see how bad they are, he is an unsophisticated seller, or he thinks you aren't a credible prospect. You don't have to see the financials in the first meeting, but you will need them soon. If you can't get them for whatever reason, the best practice would be to move on to another opportunity.
Also, if you haven't already, after this question you will likely be asked to sign a confidentiality statement. Read it, make sure it binds the seller to everything you are bound to, and sign it.
Question 3: Who are your biggest competitors?
Russ says you need to know who the company's adversaries are so you can see what they are doing in the marketplace. In addition to the obvious, the answer will also tell you whether the seller really understands who his competitors are. In today's marketplace, competition is not just the company across town. It comes in many forms and from many locations. How much the seller knows about his competition will help you understand how much opportunity there is to improve the business by creating a competitive advantage, which will contribute significantly to your purchase decision.
Question 4: What are the trends in your industry?
Like the competition question, you are trying to get specific information about the industry, plus a reading of how savvy and sophisticated the seller is. You will need both of these pieces of the puzzle so you can determine how much unclaimed opportunity can be squeezed out of the business if you decide to do the deal. Listen for clues about the maturity of the industry, as well as indications of threats and opportunities. How well positioned the business you are considering is to take advantage of the new trends will have to be included in your purchase price equation.
Question 5: What can I do to increase sales and profits?
You might think this is a dumb question because if the seller knew, he would just do it. But sometimes the answer is not about knowing, it's about having the resources and capital to take advantage of an opportunity: Add a branch across town; hire an extra salesperson; increase advertising; add new lines, etc. All of these things take money, and sometimes a seller doesn't have it or doesn't want to make the investment.
If the capital to take advantage of these opportunities is included in your acquisition plan, congratulations. However, if you don't, pay attention to this answer so you don't wind up like the seller a couple of years down the road.
Question 6: Will you finance part of the purchase price?
Russ says that 80% of all small businesses that are sold in the United States involves some seller financing. Even if you don't need it, ask for it and use it if it's offered. The terms from a seller will usually be better than the bank, it shows the owner is confident of the business' viability, and you can use your other credit and capital for things like funding growth. DO NOT be afraid to ask this question.
Question 7: Will you stay with the business for a while?
In most cases, you want the owner to agree to work with you for a while. The amount of time could range from a couple of weeks to several months, subject to the learning curve requirements and your past experience. I would be uncomfortable with a deal where the seller won't agree to spend any time with you.
The proper amount of time is the day after the seller goes from being helpful to getting in the way. Since you won't know in advance when that is going to happen, make it clear that you have the final say if you choose to cut the seller's stay short.
Question 8: Who knows that the business is for sale?
The news of the sale of any business should be handled strategically so as not to harm the viability of that company. Everybody gets nervous when a business is for sale, especially if the new owner has not been identified. That uncertainty is more likely to be a disadvantage than an advantage. For example, if the employees know about a possible sale they will naturally become concerned for their job security, which creates an opportunity for a competitor to steal some of the good ones. If the word is out before you make the deal, be sure you know how this might have hurt the business before you go too far.
Question 9: Who will I be negotiating with, and will that person be making the decision?
In Selling 101, the most important thing to know is who is the decision maker. Without this information, when you are buying a business, you could waste a lot of time dancing around with a surrogate who can't make the decision to sell.
Many is the time that a prospective buyer has spent time and resources talking with the president of a company only to find out that his mother owns 100% of the stock and pulls all the strings. Even though the buyer may not have knows that " mom" existed, she was in charge of the deal all along. As a business buyer, you MUST know who makes the decision to sell, and you need to be talking to that person.
Question 10: What is your timetable?
One of the biggest impediments to putting a deal together is when the buyer and seller are on different time frames. If you want to be in business within a couple of months and the seller is thinking sometime within a year or two, you need to know this. If the seller wants to move fast, you need to know why. Is he dying and wants to sell before that unhappy event, or is the business in trouble and he's got banks and creditors who are putting on the pressure. When you ask this question listen for a time frame, AND a reason. They usually come together.
Listen Well
Notice that many of the questions have a double purpose: 1) to get the specific information; 2) to find out how savvy, sophisticated, and motivated the owner is. The first purpose is self-explanatory. The second one has a number of subtle uses.
For example, you will begin to understand the general sophistication level of the person you will cut your deal with. If the seller seems to know his stuff, he has probably maximized the opportunity for the company, meaning you may only be able to make nominal improvements. Therefore, you should pay for what you see, not what you think you can make the company into.
However, if the seller is unsophisticated and has not maximized the possibilities available to the business, you have an opportunity to buy the business as it stands, and create value for yourself by taking advantage of unclaimed opportunity.
Listen well for what is said, how it is said, and listen for what isn't said.
This article could have been titled Business Buyer Questions 101, because you will certainly ask many more than 10 questions during the due diligence process of buying a business. And you won't ask these 10 in the order listed here. My job is to get you thinking about some of the more fundamental questions, and how the questions you ask, and the answers you get, are important to your purchase strategy.
Successfully selling a product or service is accomplished when you realize that the customer has the information that will lead to your success. Buying a business is similar, except that the probing roles are reversed with the buyer seeking information from the seller. As the business buyer, think like a salesperson: never forget that the person on the other side of the desk has much of the information that you need to accomplish your goals, which is to successfully purchase and operate the business.
Write this on a rock... When you are buying a business, ask good questions, ask lots of questions, listen very carefully, and take good notes.
