Questions that should be asked when looking to acquire a business
Updated: 12th May 2016
Buying a business is a serious investment, they don’t often come with the chance of a refund.
Before signing on the dotted line, it’s important you fully understand the business as it is, what you can expect in the future, and what life is like as the owner.
Financial information is imperative, not least if you’re hoping for financial backing from a bank or investors. Management accounts, bank statements and VAT returns will all give a clear picture of the company’s health, and you’ll need at least three years of paperwork to see which way the numbers are trending. But this is really a job for a qualified accountant, one seasoned in Due Diligence.
Make time for a one-on-one chat with the seller. The more information you can glean in advance, the better qualified you’ll be to make the right decision.
Questions about life as the owner
Once the sale is completed, you’ll be taking the owner’s position. Learning about their life in the role will help you make sure it’s right for you.
- Why did you decide to sell?
- What skills are required to do this job?
- How many hours do you work?
- What do you pay yourself?
Their pay level is more than just about your expected financial rewards, but will also help you identify if the seller has been inflating their profit figures.
Questions about the business
The financial statements are only one factor in determining whether a business is viable. It’s also crucial to know that it is built on a stable footing, and that a new owner stepping in will be able to continue and grow the organisation.
- How did you calculate the selling price?
- Are all your key processes documented?
- Are there any issues with the property, lease terms, health or safety risks, or the relationship with the landlord?
- Are there any impending legal issues, including threat of litigation, bad debts or issues with patents?
- Who are your customers, suppliers and key staff?
A business which is too reliant on a few major organisations or personnel may be successful in the present but is a major risk when planning long-term.
Questions about the future
Buying a business is not just about today, you’re investing in the potential rewards looking years ahead. A clear picture of what the future holds will help determine if the purchase meets your objectives.
- Would you be willing to remain with the company for a transition period? If so, for how long and what compensation would you require?
- Would you be willing to sign a clause that prevents you from starting a rival business in the same location?
- What are you hoping the buyer will bring to the business? Finance, stability, growth plans?
- What do you see as the biggest challenges ahead?
- What would you do next to grow the business?
The seller may not have answers to all your questions, but should at least be able to provide you with a clear picture of what you’re buying into.
A seller may also be nervous about revealing so much information, especially if you’re already operating in the same industry, but it’s in their best interests to be open in order to secure a sale.
You’ll also have to use your best judgement as to whether the answers are entirely truthful, but one clear warning sign is an individual being too cagey with the truth. If you don’t like the answers, or you’re not even allowed to look behind the curtain, be prepared to walk away from the deal.
If you’re looking to acquire a business, our trusted advisors can assist you with research, Due Diligence and assessing the viability to ensure a smooth and successful transition.
Emma qualified as a Chartered Accountant in 2002. Since then, she has specialised in corporate finance, joining BTG-McInnes in July 2006. She has extensive experience in advising the SME market on fundraising, re-financing, acquisitions and disposals, across a broad range of industries.