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Five Questions to Ask Ahead of Buying a Business
ENLIGN DEAL TEAM | 04/25/2022
When buying a business, some people have forgotten to ask important questions that they should have. But you don't want to be in a situation where you wish you had known something that would have changed the way you made a decision. So, let's look at some questions that people often forget to ask.
1. What Does the Sale Include? You might be so focused on buying the business itself that you miss important details, like what comes with it. Don't just assume that you'll also get important assets like real estate, inventory, or machinery. All of this needs to be carefully laid out and written down. You'll want to know exactly what you'll get in exchange for your money in the form of an Asset List. An asset list should include each item of material value included in the sale and the sellers estimate of value. If there are significant assets a third party appraisal may be needed.
2. What kind of assets are there? You'll need to know everything there is to know about the proprietary materials and make sure they come with the business. You'll want to make sure that any intellectual property, like patents and copyrights, formulas, or software, is included. An Excluded Asset list may be appropriate as well. For example, their might be leased equipment or out dated inventory or even personal property excluded by the seller. You'll want to know why it's not part of the sale if it's not. After all, these things could make or break the business.
3. How can the business grow? Before you buy a business, you should think about how much it could grow and how. Many sellers will be happy to share ideas and plans with you. If the business isn't expected to grow much, you'll want to know that ahead of time as it will likely impact the multiple a buyer is willing to pay. Also, you should think about how much working capital you'll need to not only run the business but also make any changes that are needed. It's also critical to know if you will be bringing or borrowing the working capital or if the seller will be leaving working capital. In smaller transactions expect the former, in larger transaction expect the latter.
4. What potential threats are there? Is there growing competition in the space? Is there a disruptive technology on the horizon? Are employee and vendor relationship steady? Are clients happy or is there a lot of turn-over? These are just some of the questions a business broker will insure are properly addressed.
5. How are people being hired? You should think about how much the current owner or manager is needed for the business to run. How much will the business change if and when the current owner leaves? You will also want to know a lot about the people in charge and how much experience they have. It's important that your expectations match what's going on. As you can see, there are a lot of things to think about before you put your name on the dotted line. During the due diligence process, a lot of this will be taken care of. But, it's important to ask the right questions and speak up when you don't understand something. When a business has been thoroughly researched, you'll not only feel confident, but you'll also do better in business.
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