So, you have come across this promising business you want to buy. You have started the due diligence process and looked at the financial statements. The business shows good potential. You have a pretty good idea of what it will take to get acceptable return on your investment.
What should be your next step? How can you convince yourself that you are not buying a lemon?
As we mentioned in an earlier post, performing due diligence before buying a business is a lot like the work of detectives in television show CSI. You are trying to understand and solve the mystery of how the business really is performing and how it will perform in the future. At the end of due diligence your goal is to get answers to the questions listed below about the seller and the business.
- Why is the seller selling business?
- How is the business currently performing?
- What factors are contributing towards the current business performance?
- What is the future potential of the business?
- What will it take to close the deal, if you do decide to move forward?
You can use some of the techniques we mentioned in an earlier post to get answers to these questions. In addition, you need to have face-to-face meetings with the seller before signing on the dotted line. You should aim to have at least two such meetings. The goal in the first meeting is to get to know the seller and the business; while in the second meeting you should ask more detailed questions to understand the business inside out.
With that in mind, we have listed below the questions you should ask the seller in the first meeting. Again, the purpose of these questions is to find answers to the questions about the business we listed earlier.
- Why are you selling the business?
- How long has this business been at this location? How long have you owned it?
- Who are your competitors in the area? Are there online competitors?
- How much time do you spend on the business? Do you operate it full-time or part-time?
- How many employees do you have? How long have they been with you?
- Do you employ full-time / part-time managers? How long have they been with you?
- What is your opinion about the franchise? (Applicable if the business is franchise)
- How do you do marketing for the business?
- How soon are you looking to close the deal?
- What do you plan to do after selling this business?
What other must-ask questions would you recommend?
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