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Questions to ask when buying an existing business?

What questions should be asked when taking over an existing business?

Question posted by Bplans User (488 points) 3 years ago. Answers: 1

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There are so many questions to ask when considering the purchase of an existing business. In fact, there is not enough room on this page to list them. But let me give you a few examples that relate to financial, marketing, ownership and operations:

  1. Most importantly, why is the seller selling? The answer will either raise red flags or be consistent with, and met with, no resistance when asking the information in the questions below.
  2. Have you asked to review the certified financial statements of income, cash flow and balance sheets for the last three years? If you borrow from a bank to purchase the venture, the bank will want to see them.
  3. Have you asked to see the company's (not the owner's personal) IRS returns for the last three years? The bank will.
  4. Have you asked for a copy of all documents of all outstanding indebtedness like notes payable, accounts payable, real estate and equipment leases? The bank will.
  5. Has the seller offered to stay around for awhile after the sale to help with transition, and have you discussed some compensation for his services during that transition period?
  6. Have you been allowed to talk with the employees, or is this sale of a confidential nature at this time? If so, why are the employees not being told of the impending sale?
  7. Has there been any significant turnover of employees? If so, why is that?
  8. Have you learned anything about the quality of customer relations at the company? Is there a close relationship between company and customers?
  9. Have you learned anything about the relationship between the company and its vendors? Do vendors display preferred, regular or irregular relations with the company?
  10. Are there any members to a management team for this company? If so, are they aware of the impending sale, and how do they feel about it?
  11. What are the actual conditions of the working environment? Are there any hazardous situations or is this a well-kept workplace?
  12. What are the actual conditions of existing fixed assets like office equipment, machinery, vehicles and the like? Do employee, managers and supervisors demonstrate good maintenance and cleanliness of company property?

There is so much more to ask, but this is a brief list designed to give you a starting point from which to begin the investigation of the venture in which you are about to invest.

We have not even discussed the issue of fair market value or selling price of the venture. I would suggest you will want to examine some of the expert panel responses on this subject. It is a detailed matter requiring a significant explanation. Another relevant source of information on buying and selling businesses is the Entrepreneur Magazine Small Business Advisor. It is an excellent book with a most extensive array of subjects for any small business entrepreneur, addressing all aspects of the operation in easily understood language and graphic examples of the topics. It is an excellent investment for the purchasing process and can be used repeatedly when operating the venture. It is readily available online or at a reputable bookstore.

Stephen Windhaus

Answer posted by Stephen Windhaus (825 points) 3 years ago

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