Purchasing a small business is a big decision. Every business comes with its own unique qualities and strengths, but they can also be saddled with debt, lawsuits, or contracts that affect how much they’re worth. Before you commit to buying a small business, here’s a rundown of the top financial-focused questions you should be asking.
Why Is The Business For Sale?
Check why the owner is selling the business assets. You’ll want to look out for problems such as poor financial performance, a shrinking market and customer base, or lawsuits against the company.
How Much Am I Paying For The Business?
Be very clear about how much you’re actually paying for the business, and whether there are any hidden fees, expenses, or transaction costs you need to know about. Knowing these details helps you establish if the business is worth what you’re paying for it.
What Assets And Liabilities Are Included In The Purchase Price?
Sometimes, an owner only sells part of the business. They may retain control over some assets. They may also be selling costly business debts and liabilities to you. Be entirely sure of what you’re buying before signing anything.
What Are The Company’s Gross Revenues In Recent Years, And What Are The Net Losses?
You need some preliminary information on how much profit the business has generated in the last few years. You also need to know if it’s operating at a loss. While you can conduct more thorough investigations later in the purchasing process, at the beginning of negotiations, find out basic financial health details before going any further.
Can I Afford To Buy This Business?
Be honest about your other commitments before you purchase a small business. Consider whether you can afford the purchase based on your investment portfolio, your personal bills and outgoings, and your family situation.
Are Financing Options Available, And Do I Need Finance?
You may be able to secure an all-cash deal, but there’s always the chance that you’ll need financing to complete the transaction. Check what financing options are available, and choose the one that best suits your financial situation.
Which Documents Should I Examine Before Buying This Small Business?
If you’re sure you plan on buying this business, it’s time to do your due diligence. This means checking that the business is actually worth what the seller says it is, and whether there are any outstanding lawsuits or liabilities that could affect the company’s value.
Examples of documents you’ll want to examine include:
• Tax returns
• Cash flow and profit and loss statements
• Customer lists
• Business incorporation documents
This list is not exhaustive, and you should always seek legal advice before committing to a purchase.
Before you commit to purchasing a small business, it’s important that you understand why the business is for sale in the first place, why you want to acquire it, and whether you feel the company’s financial performance justifies the asking price.
The bottom line is that you should never be afraid to ask as many questions as necessary to make the right decision. While buying any business always comes with associated risk asking enough questions upfront can reduce your risk of making a poor investment.