Nine First Questions To Ask When You're Buying A Business
In this space in May 2020, I predicted that there would be an increase in baby boomer-owned small businesses for sale in the coming year or so. As you’ve likely seen, 2021 reports are coming out on how the pandemic has weighed heavily on the retirement motivations of all Boomers, including the business owners. And that change of plans for these owners could become opportunities for the younger generation of entrepreneurs.
So, as you consider this tend and associated opportunity, you’re likely to think, "Hey, I've made big purchases before – a sofa, a car, a house – this can't be that different, right?"
Wrong!
Paraphrasing Mark Twain, the difference between making a large consumer purchase and buying a business is like the difference between lightning and a lightning bug.
Every business sale is a unique transaction, which is the opposite of buying a commodity, like a car. And besides being the most complicated transaction you’re likely to ever undertake, with all of the components that make up any business, there’s one more, huge factor in buying a small business: it's someone's life. Consequently, the education process for such a transaction is quite involved.
To help you begin this long process, consider a few early questions to ask a prospective business seller, suggested by my friend and business-buying expert, Russell Brown, each followed by my thoughts. And while I’ve numbered them, it’s unlikely you’ll ask them in this order.
1. Why are you selling?
This question isn’t abrupt or inappropriate as long as you work it in at the right time. Regardless of the answer, it's information that may contribute to your decision about whether to buy and how to negotiate.
2. May I see the last three years of financials?
You’ll use their numbers as a base from which to “recast” and project your future business, adjusted for how you’ll run it. If the seller refuses, either he doesn't have any, doesn't want you to see how bad they are, thinks you aren't a credible prospect, or you’ve asked for them too soon.
3. What are the industry trends and greatest future challenges?
The answer will inform you, and/or tell you how much the seller understands the current marketplace. In the 21st century, market challenges and competition comes in many forms and from many directions. You’ll need both pieces of the puzzle to determine how much unclaimed opportunity can be realized.
4. How can I increase sales/profits?
You might think if the seller knew he would just do it. But often he knows the answer, but doesn’t have the expertise, capital, or even desire to take that next step. This would be especially true regarding new technologies and 21st-century marketing strategies.
5. Will you finance part of the purchase price?
Russ says that 80% of all small business sales in the United States involve seller financing. Even if you don't need it, ask for it and use it if available. Any terms from a seller will usually be better than the bank. Plus, it shows how confident the seller is about the business' viability. Do not be afraid to ask this question.
6. Will you stay with the business for a while?
In most cases, you want the owner to agree to help you make the transition, which could range from a couple of weeks to months. Be cautious of any deal where the seller won't 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.
7. Who knows the business is for sale?
Mishandling the news of any business that's for sale can harm its viability, especially with key stakeholders: employees, customers, and vendors. The trick is timing the breaking news with closing the deal so that gap doesn’t create problems.
8. Who will I negotiate with, and who will make the decision?
In selling or buying a business you must know who’s the decision-maker. Otherwise, you can waste a lot of time dancing around with a surrogate who can't pull the trigger. As a business buyer, you need to be talking to the real decision-maker as soon as possible.
9. What’s your timetable?
One of the biggest impediments to putting a deal together is when the buyer and seller are on different time frames. When you ask this question listen for the time AND the reason – they usually travel together.
Notice that most of these questions have a dual purpose: to get specific information and find out how savvy, sophisticated, and motivated the owner is. When buying a business, ask lots of questions and listen for the six interrogatives: who, what, when, where, how, and why. In time, you’ll start noticing what isn't said.
Write this on a rock ... This is the equivalent of your first hour of class on the way to acquiring a four-year business-buying degree.
Jim Blasingame is the author of The 3rd Ingredient, the Journey of Analog Ethics into the World of Digital Fear and Greed.
