Raising Finance – the must ask questions!.
The Must-Ask Questions to the Experts When Buying A Business
You have made significant purchases before, so what is so complicated about buying a business? Unlike a commodity, which is a dormant asset, a company is made up of many components. Besides, you need to be sure you can run the venture successfully.
Therefore, before signing on the dotted line, assess the business to avoid taking unnecessary risks. You need to know the questions to ask and the information to look for before making a decision.
If the seller is using a broker, before you do your due diligence and fact-checking, have a heart-to-heart with them. It will give you a feel of the company. Ask about the history of the business and the reason it is on sale. The response will guide you on the next steps.
The typical answers are early retirement or health issues. If the business is on sale due to poor financial performance, you may want to find another venture. However, if you can turn the company around, it could be a worthwhile investment provided you can get it at a low price.
You also need to have a clear understanding of how the business is run. Are the procedures of the business documented or will there be a handover period where you can find out how things are done. You need to ask the broker how the seller plans to pass this kind of knowledge on to you.
Some other general questions to ask:
- How old is the business?
- Who are the major competitors?
- Is revenue verifiable?
- What are the chances of the business becoming obsolete?
- Is there an established customer base?
The financial health of a business is vital when making a purchase and this will play an important role in your ability to raise finance. Therefore, you should get your accountant to analyse the financial records and determine potential growth. Ask your accountant the following questions:
- What is the company’s financial position? How are the financial statements for the past three years? How is cash flow?
- What are the revenues and expenses? Is income increasing or decreasing? What can be done about the declining revenue?
- How can the company expand its market share and increase profits?
- Has the business been filling accurate tax returns?
Financial documents should provide the necessary information. However, if the business is wary about giving you financial records, you need to figure out the reason. Financial records may sometimes be inaccurate. Therefore, ensure the seller can provide evidence. If the asking price is based on the cash flow, is it verifiable?
The legality of business contracts and lawsuits could affect the future of the company. It is prudent to find out if there are any ongoing lawsuit or past cases and their outcomes. Ensure your attorney reviews current business contracts to avoid future problems.
You should also ask if there was any transaction conducted without an agreement. Are there any industrial regulations that could affect the company? All this information will guarantee a smooth transition after the acquisition.
Some businesses rely on traffic and location. Therefore, you need to know if you will retain the lease agreement. Make sure the lease is intact if you wish to retain the current customer base.
Your legal team should also be able to find out whether the business has any debts that could jeopardise the business operations.
Condition of the assets
What equipment is available, and what condition is it in? Purchasing new equipment and repairs are costs you should avoid. You need to know the condition of the equipment before you settle on a price for the business.
If you are not able to determine the condition of the equipment thoroughly enough, you might want to find someone with the right expertise to give it a once over. This could be a maintenance expert or someone who works with similar machinery.
Asking the right questions puts you a step closer to a profitable business acquisition. However, you also need to pay attention to the red flags.
By Matthew Hernon is an Account Manager at Dynamis looking after Business Transfer Agents and Franchises across BusinessesForSale.com and FranchiseSales.com