40 Common Questions to Ask When Buying a Business

Buying a business is like making any other investment: You want to be sure that it’s a smart and sound use of your money. Most crucially, you need to verify that the business is actually worth the price that the seller is asking and that you’ll be able to keep generating revenue long after the transaction is complete.

This means that performing your due diligence by asking the right questions is a critical part of the buying process. In this article, we’ll suggest some of the most important questions to ask when buying a business, separated into a few major areas of inquiry.

General questions about the business

When speaking with the current owner or seller, it’s a good idea to start off with some “icebreaker” questions about the company before branching into other topics to explore.

Understanding why the current owner is selling the business is a particularly important question: The business owner may simply be retiring, or there may be deeper problems and red flags such as diminishing revenues.

• How old is the business?

• What is the complete history of the business? Has it been for sale or purchased before?

• What are the greatest strengths and biggest challenges of the business?

• Why is the business being sold?

• Are you in discussions with other potential buyers?

As a potential buyer of a business, whether it’s a small business or large, it's important to take some time to learn about the company and its history. Asking the right questions can give you valuable insights into the strengths, challenges, and impact of the business. Understanding why the owner is selling can also give you a better idea of the deal.

Financial questions about the business

Buying a business is not just about finding a company that appears to be successful but rather about understanding the business's financial and legal risks, the viability of the business, and the potential for growth.

Prospective buyers should perform due diligence and go over every inch of the business’s financials with a fine-tooth comb before seriously contemplating the purchase. If necessary, find a qualified accountant or other financial professional for assistance. Here are some essential questions you should ask the current owner.

• What is the financial health of the business?

• What are the company’s audited year-end financial statements from the past three years (including balance sheets, income statements, and cash flow statements)?

• What are the company’s tax returns from the past three years?

• What are the revenues and net profits from the past three years? How do these figures break down in terms of different products, services, and customer segments?

• What are some of the business’s key financial metrics and ratios (e.g. debt-to-equity ratio, net profit margin, and return on equity)?

• Does the business have any debts, liabilities, or accounts past due?

Careful examination of audited year-end financial statements, tax returns, revenues, and net profits over the past few years can provide insights into the company's financial performance. The right questions can help buyers determine the financial health of the company, identify any potential issues, and make informed decisions about future purchases.

Legal questions about the business

Just as an accountant can help you with financial questions, it’s highly advisable to find a lawyer to look at any contracts or laws pertaining to the business—as well as the eventual purchase agreement, if it comes to that.

• What are your existing contracts with vendors and employees?

• Do you have any leases or mortgages for your physical business outlets?

• Is the business up-to-date with all necessary business permits, licenses, and certifications?

• Is the business currently involved in any lawsuits? Has it been involved in lawsuits in the past?

• What intellectual property assets does the business have (copyrights, patents, trade secrets, etc.)? How does it protect these assets?

• What laws or regulations affect the business? Are there any upcoming changes to the legal landscape that could affect the business’s operations or profitability?

Ask the seller these questions to ensure that all legal aspects of the business are in order to avoid potential legal issues or complications down the road.

Business questions

Financial and legal risks are some of the biggest reasons why transactions fail, but you also need to be sure that the business is viable for the indefinite future. Take some time to learn about the company's past and current performance, market trends, and competition to make an informed decision about whether this company is the right choice for you.

• Who are the biggest competitors? How does the business distinguish itself?

• Who are the target audiences? What does the customer base look like? Are most of the customers recurring or one-time?

• What is the current and historical market share?

• What are the sales and marketing campaigns? What are the historical and current sales forecasts?

• How many employees does the business currently have? What are their roles, salaries, and benefits?

• Who are the current vendors and suppliers?

Questions about the competition, target audience, market share, and sales and marketing strategies can provide valuable insight into the potential for success. Additionally, understanding the current team and vendor relationships can help make informed decisions about the future of the company.

Questions about the price and purchasing process

Once you’ve thoroughly vetted the business itself, it’s time to discuss the transaction price and the logistical details. It's important to clarify what the price is based on, specify each asset that will be transferred, and find out whether the seller plans to retain any ownership or play a role in the business post-sale.

• How was the asking price for the business calculated?

• Which assets are included in the price?

• Is the price of the sale negotiable?

• Will you accept offers with financing, or only all-cash deals? Is seller financing available?

• Do you plan to retain some ownership of or role in the business after the sale?

• Will you assist during the hand-off period to ensure a smooth transition?

Understanding the price and purchasing details is crucial for a successful business acquisition. It ensures that the buyer will make a well-informed decision and that the transaction is fair and equitable for both parties involved. By knowing how the asking price was calculated, what assets are included, and whether the price is negotiable, the buyer can determine if the business is worth the investment. Additionally, understanding the logistics of the transaction, such as payment options and the owner’s post-sale involvement, can help ensure a smooth transition of ownership and operation.

Conclusion

Buying a business is a significant decision that requires careful consideration and due diligence. Asking the right questions can help you evaluate whether the company is worth the investment and whether you can generate revenue over the long term. When considering such a purchase, it's essential to take the time to learn about the company, its history, and its current state. Understanding why the owner is selling can also give you a better idea of the deal and how to negotiate.

Once you've evaluated the business, you can start negotiations regarding a price and discuss logistical details such as the assets included in the sale, financing options, and the current owner's role in the transition period.

By utilizing the appropriate tools, prospective buyers can navigate the complexities of buying a business with confidence. Deal room software can streamline the management of sensitive information and financial records, ensuring secure and efficient communication between buyers and sellers. This software can contribute to a smoother transaction and facilitate the exchange of critical documents and data.