18 Questions I would ask a Seller if I Were Buying a Business
When you are considering purchasing different businesses, it is a good idea to have some general questions answered on the front end before you go into deep analysis of the opportunity. This can save you both time and money (professional fees) as a Seller’s response to some basic questions might make the business less attractive to you.
If I were considering purchasing a business, below are some basic questions I would ask the owner. I also included my reasoning as to why I would ask each question.
- Why are you selling?
- How did you determine your asking price? Or what are you price expectations?
- What is included and excluded in your asking price?
- How long have you owned the business and did you start it?
- If you were gone for 3 months, how much would your business suffer?
- How long would you be open to staying for a transition time?
- What are the 3 to 5 most important skills a new owner should have to run the business?
- What is your customer concentration? Any customers more than 10% of revenue?
- Do any of your employees, customers or suppliers know you are selling the business?
- Do all of your employees have social security numbers and are you withholding their payroll taxes?
- Knowing everything you know today, if you were buying the business what would you do to grow it?
- What are the 3 biggest concerns for the future performance of the business?
- Is there any active or potential litigation you know about?
- Is there any future law changes or industry regulations I should be concerned about?
- Is there a new competitor coming to this area that you are aware of?
- If you were keeping the business, what capital expenditures would you make in the next 3 years?
- What part of the business will you not miss after the sale?
- What happens after we go under contract and enter due diligence?
1. Why are you selling?
Ideally, I would like to hear the owner say they are retiring. If the owner says they have other business interests, I would dig a little deeper on this response as a Buyer.
2. How did you determine your asking price? Or what are you price expectations?
If the Seller has not given a purchase price, I would ask for their price expectations. If there is an asking price, I would ask how the Seller determined the asking price. Many times, the Seller has no idea what their business is worth, especially if it is a For Sale by Owner.
3. What is included and excluded in your asking price?
It is important to understand what the Seller thinks is included in the purchase price, especially if they are not working with a business broker. I have seen owners asking for a price for the business and also expect to be paid additionally for the Equipment and Inventory. Buyer and Seller should get in agreement early on what is included and what is excluded from the purchase price.
4. How long have you owned the business and did you start it?
This is a basic question to give you an understanding of the business. If they purchased it within the last 3 years, this could be a red flag and I would want to know why they are selling so soon.
5. If you were gone for 3 months, how much would your business suffer?
I want to get an idea of how important the owner is to the business since he/she will be exiting the business sometime after the sale. I would want to make sure the customers are customers of the business and not the owner.
6. How long would you be open to staying for a transition time?
It is always nice to know you have a safety net if needed after you purchase a business. There should be some amount of transition time with the sale and also additional phone support after the sale.
7. What are the 3 to 5 most important skills a new owner should have to run the business?
Many times, the owner has been running the business for decades and they will know what will make a new owner successful. After they respond, you can decide if the skill sets required to run the business are your strengths.
8. What is your customer concentration? Any customers more than 10% of revenue?
I want to see what potential customer concentration risks exist. It is great if you have a great long-term customer who you can count on to give you 15% or more of your annual revenue. However, what would be the damage if that customer closed their doors or took their business elsewhere? Could the business easily pick up additional revenue to replace that large customer? Customer concentration can really get scary if one customer makes up 30% or more of the business. This is typically when a customer retention or earn-out might be used to offset some of the Buyer risk.
9. Do any of your employees, customers or suppliers know you are selling the business?
Normally the answer is “no”, but I would like to know the answer. If the Seller’s larger customers know they are selling, this might allow a Buyer to confidentially talk with the larger customers on a group call. This would be HIGHLY unusual before the sale.
10. Do all of your employees have social security numbers and are you withholding their payroll taxes?
I want to make sure all employees are legally employed and are being accounted for per IRS guidelines.
11. Knowing everything you know today, if you were buying the business what would you do to grow it?
Many times, owners are burned out and they are very content with where their business sales are at. They might know how to significantly grow the business but no longer have the energy or desire to grow the business. This is a great question to understand what those potential growth options are.
12. What are the 3 biggest concerns for the future performance of the business?
This is a great question to understand what your risks are as the purchaser.
13. Is there any active or potential litigation you know about?
This should be disclosed before the sale actually takes place, but it is better to know about potential litigation before you invest a lot of time and money into a transaction. Depending on the severity of any existing legal issues, you might not want to pursue the business.
14. Is there any future law changes or industry regulations I should be concerned about?
If you are not in the industry, you don’t know what you don’t know. This is a great question to ask as this might be the very reason the owner is selling the business.
15. Is there a new competitor coming to this area that you are aware of?
Once again, this might be the reason the owner is selling.
16. If you were keeping the business, what capital expenditures would you make in the next 3 years?
I would want to know what major capital expenses I should expect in the first few years of owning the business.
17. What part of the business will you not miss after the sale?
This tells me what the owner feels are the challenges of the business. I could then decide if I want to deal with those challenges as the owner.
18. What happens after we go under contract and enter due diligence?
Once you are under contract, I would bring in a CPA to review the financials and tax returns in detail. As part of that review, the CPA will almost always have follow-up questions, which is normal and expected during due diligence.