Questions to ask when buying a Business

Author: | Last Updated: 1 Aug 2020

The business-for-sale market in Australia during COVID-affected 2020 has been a contradiction of unique opportunity and uncertainty.  Data from Australian Government departments shows that, while business-for-sale transactions in April this year were 51% down on 2019, there has since been a steady upward trend in sales (to the point that there were just 5% fewer deals in September 2020 than last year).  Perhaps even more notably, buyer confidence rates are sky high presently, where 57% believe they can buy a business for a better value than last year.  For those with this mindset, whether now or any other year past, prospective buyers are well advised to do their homework on a business they may be interested in.  The best way to learn about a business is to ask questions, and the best of those to ask current owners will likely include the following.

Why are you selling?

Most owners do not decide to sell overnight, so request that they expand on their reasons for parting ways.  Frequently stated reasons for selling include retirement, family issues, or ill health, all of which may indeed be true.  If the seller however is getting out because new competition is looming or there’s been a decline in trade, it’ll be in your best interests to learn as much about this as possible.

How have you arrived at your asking price?

Understanding how a current owner has reached the for-sale price for a business can aid you in ascertaining its genuine value.  It goes without saying that you should also get an independent valuation.  Normal valuations use the income capitalisation as well as the asset-based methods of assessment, but there are also other methods (such valuation method) which can provide more accurate indication of small business value.

What key stakeholders does the business have?

It is very much worth asking if a business relies significantly on one customer, product supplier or service provider relationship, or a particular employee’s unique expertise.  If these do exist, then it is important to know both whether they are aware of the business being on the market and, also, whether contractual ties with them are in place.  Without these, the risk you face as the new owner of a business is substantially increased.

What is your involvement in and take-away from the business?

Ask the seller of a business how many hours they themselves work there each week.  Also, enquire as to how much they pay themselves for the same.  The former will need to be weighed up against your own time commitments and/or desired work-life balance, while the latter provide a guide as to whether the financial bottom line looks better due to how much the current owner does (or does not) pay him or herself.

Are you willing to agree a non-competition clause?

No buyer wants to purchase a business only to find its seller is readying to launch a new competing one.  This is of particular importance in situations where a large and devoted client base with admiration for the initial owner’s quality of product and/or service exists.  Ask about the seller’s willingness to sign a clause preventing them setting up a business which competes against your own within a specific location and within an agreed period of time, agreements that commonplace in the sale of businesses such as cafes or hairdressing salons.

Categories: Business