You’re interested in buying or investing in a business. Congrats! That’s a big step. But, first thing’s first: Do your homework before putting an offer on the table. And, the first step? Ask questions — lots of them.
Having one-on-one conversations with a seller is imperative to really determining the state of the business, and it sets you up to ask the important questions for making the best decision.
Below, we’ve provided seven questions to ask before you buy or invest in a business, along with what the right and wrong answers look like and what they mean:
Why are you selling your business?
The right answer: The seller’s response to this question should align with the information he or she has already shared when you did your initial evaluation of the company.
It’s also helpful to ask the seller to touch on what he or she would do differently, which will give you an idea of how to add value to the business and set yourself up for success.
The wrong answer: If the seller’s answer doesn’t line up with the information you from your initial evaluation of the company, that’s a red flag. Buying or investing in a business from a seller who is not transparent with you is not recommended.
How did you determine your asking price?
The right answer: If the seller is upfront about how he or she determined the asking price, you can get a sense of what kind of negotiations you can make. And if the seller’s reasons sound random or arbitrary, you’ll know that he or she may be open to discussing a lower price.
The wrong answer: If the seller is unwilling to provide this information, that means he or she may not negotiate with you. Without knowing the business owner’s motives behind the asking price, you won’t be able to determine if there’s room for negotiation.
Are you willing to sign a non-compete agreement?
The right answer: Yes. When a seller agrees to sign a non-compete agreement, you’re safe to move forward with the buying process.
The wrong answer: No. If the seller is not willing to sign a non-compete agreement, it’s probably best to walk away from the opportunity.
Which employees make your business successful?
The right answer: A seller who can pinpoint the business’ key employees shows that he or she is aware of employees’ successes, which can give some positive insight into the workplace environment.
And if the seller is willing to give out those employees’ contact information, it’s best to get to know them and their opinions on the company before making an offer.
The wrong answer: If the seller cannot recognize who his or her key employees are, that’s a concern. A seller who is unfamiliar with employees’ contributions to the company shows a lot about their character and how the business is run.
Do your employees know you’re selling the business?
The right answer: A seller who is transparent with his or her employees about a new change is crucial for creating a supportive workplace that can lead to success when transitioning to a new owner.
The wrong answer: If the seller has not been transparent with the business’ employees about the sale of the company, it’s likely that success will be hard to acquire. The seller’s reluctance to share this imperative info can instill negativity and concern in the workplace.
How have you documented your business’ finances?
The right answer: A seller who can provide a clear paper trail for his or her company’s finances is the best-case scenario. It’s also important to have access to documents like tax returns, so you can have info to back up any claims the seller might have already made.
The wrong answer: If a seller cannot provide the necessary information and documents regarding the business’ finances, it might be a sign to walk away from the offer, as it could be a direct correlation to the state of the business as well.
Do you have any potential or pending lawsuits?
The right answer: No. If the company has never suffered from a lawsuit, past or present, it’s a good sign to move forward.
The wrong answer: Yes. It’s best to completely avoid buying or investing in a company if there have been any lawsuits against the company.