Asking the right questions can help you make a more informed buying decision.
Some entrepreneurs believe that buying an existing business carries less risk as compared to starting one from the ground up. While this may certainly have a ring of truth, you should still observe due diligence to come to the right decision. To do this, learn how to ask the right questions.
So, what information do you need to get from the other party? Should you stick with the standard questions most prospective buyers ask to help you make an informed buying decision? Is it enough to ask about the company's current value and financial performance? These boilerplate questions may not be enough to help you get a more realistic insight on what you can expect to gain from your investment.
Most sellers expect that you will ask these questions, so they have already prepared their answers ahead of time. They are prepared to show you why your buying their business can be good for you but they are also keen on keeping the negative points from showing up and spoiling the deal. They are prepared to paint their company in the best light possible – even if there are some serious issues that can negatively affect the company's growth and income potential.
How can you prevent these things from happening? Well, you can start by asking these must-ask questions:
How did the seller come up with the asking price? While some buyers do not care about how the seller determined the company's worth, determining the valuation method used can help you negotiate a better price. If the seller used a method other than the multiplier valuation method (using the company's annual profit to establish its value and adjusting the figure based on a number of set variables), you can ask him to use it to come up with a more agreeable price.
When did the seller decide to put the business up for sale? Instead of asking why the seller decided to sell the business, consider asking when they decided to put the business on the market. For all you know, the timing can tell you more about the state of the business than you can ever imagine.
What does the seller aim to get from the sale? Contrary to what most people believe, not all sellers are motivated by profit alone. Some business owners sell to ensure that their employees will continue to enjoy a healthy working atmosphere while some want to make sure that their business will continue to grow despite the change in ownership.
Asking the seller the specific business strategies he used while he was at the helm of the business, the obstacles that prevented him from implementing these strategies and what needs to be done to put the plan into action are also useful in determining the company's earning potential. In addition, you should also ask the seller if he is willing to sign a non-compete clause. No one wants to buy a business if the previous owner plans on establishing a highly similar business and taking all his existing customers and clients with him.
Protect your investment by asking the right questions. It's your right.