Evaluating a Business for Sale - What to Ask the Owner
One of the most important aspects of evaluating a business for sale is knowing what questions to ask the owner. As part of your preliminary due diligence, you’ve inquired about several businesses and created your ‘short list’ of a few top candidates. The next step is to delve deeper and speak directly to the person or team responsible for running the business.
This first-hand information will clue you in to the actual state of affairs when it comes to the business you’d like to purchase. Your questions should be specific and give you a complete picture as to how the business operates, how it generates revenue, and how it makes money for the owner.
7 Questions To Ask the Owner When Evaluating a Business for Sale
1. Why Are You Selling the Business?
This is probably the most important question to ask the current business owner. How they respond will direct the entire course of the buying process. It can lead to additional questions, or halt the buying process altogether.
Common answers include wanting to cash out to build up equity or impending retirement. Even if the owner is retiring, you’ll also want to look for red flags like a dwindling customer base or perhaps new regulations that can affect the profitability of a business.
Don’t be surprised if there are additional reasons that the owner is selling the business that they don’t bring up. These reasons may not be a deal breaker, but if they exist, get into the habit of checking and double checking all the information you receive from the seller of the business.
2. How Are You Compensated?
Another important question to ask when buying a business is how the owner is being compensated. There may be more than one answer, but this is a key question. If a business doesn’t have sufficient cash flow to support an owner and their family to make a reasonable living, is it worth buying?
Remember, compensation may not be straightforward. Owners may compensate themselves with a variety of cash draws, W-2 earnings, and access to company resources.
It’s important to know exactly how the owner has benefited from the business. This will give you a general idea of the business financials, which will further help you determine whether to place an offer on the business.
3. Do You Have Immediate Cash Flow?
When you purchase a business, you are buying earnings, which is the one of the primary benefits of buying an existing business. Review financial documents carefully to determine the state of cash flow and to see how money is flowing in and out of the business. Cash flow statements are typically broken down into operating costs, financing activities, and investments.
If revenues are declining for some reason, you’ll want to know why. There can be very good reasons for a decline in revenues like seasonality, illness, or a shortage of supplies needed to fulfill orders. Get an explanation and check the accuracy of these claims so you can make any corrections should you decide to purchase the business.
4. What Are Your Biggest Business Challenges?
The answer here will be one of the most valuable pieces of information you can gather from a business owner. You may even want to phrase the question in a way that asks the seller what frustrates them the most. Here you’ll find out about the business' biggest weaknesses and biggest opportunities.
The answer may either excite you or cause you to go in a completely different direction. Consider whether the current challenges of the owner may actually be one of your biggest strengths. Circumstances outside the owner's control, like zoning changes or general industry decline, should make you wary about facing the same challenges once you take over the business.
5. What Are Your Most Valuable Business Resources?
One way to find out if an acquisition will be successful is to ask the owner if the business for sale includes its existing resources, such as a skilled workforce. If the owner tells you about a key employee or vendor relationship that you will not inherit, this could be a problem.
You should even be aware of special certified designations that qualify the business owner for deals reserved especially for small business, women, minorities, disabled veterans, etc. If you won’t have access to these same resources or designations, it could mean difficulty for you when trying to duplicate the same level of success as the previous business owner.
6. What is the Nature of Your Customer Base?
You’ll want to know if customers are individual consumers or large businesses, or even if there is any amount of government work. Are there just a few large, established customers or thousands of smaller customers that come and go? There are advantages and disadvantages to all kinds of customer characteristics, but it’s good to know ahead of time what to expect should you decide to purchase the business.
Furthermore, are these recurring customers or is each transaction a done deal? What does it cost to acquire a customer and what would be their lifetime value? These are just a few questions to ask so that you can drill down to a complete picture of the business customer base.
7. Who Are Your Major Competitors?
Finally, when evaluating a business for sale, you’ll want to get a pulse regarding market share, threats, and competition. Ask the owner who their major competitors are and what areas they excel in. Ask if the business has any advantages over its competitors, plus whether these competitors are direct or indirect (i.e., providing a similar service but not in direct competition).
Spending time with the owner and getting answers to these questions will give you a much clearer picture about what the business offers. In addition to valuing the business for sale, due diligence when evaluating a business will help you determine whether or not the opportunity is worth pursuing further and meets your buying criteria.