Top 10 questions to ask a seller before buying their business

When buying an existing business, there are many important points and factors to consider. One of the best sources of information about this is the seller himself. He must provide you with data on finances, marketing, assets, ownership and operations of the company, so it is important for the buyer to start a dialogue with him.

Make sure you're asking the right questions, — this is the key to making an informed decision about whether or not to continue buying the business. Important issues not addressed at an early stage can have negative consequences and lead to significant delays in the transaction process.

Often, the buyer, having learned some additional details about the company, reconsiders his offer to purchase the business or refuses it altogether.

So, let's look at the questions you should ask the seller before putting your signature on the dotted line.

1. Why are you selling the business?

This might be the most important question you'll ever ask. It can affect how you make a business profitable, or make you think twice before agreeing to a deal. If a salesperson says that the company's finances are his primary concern, that should be a wake-up call. On the other hand, if the seller just wants to retire, move, or has family obligations that are not related to the business, this is an ideal situation.

Furthermore, any delay on the part of the seller should be considered suspicious. You should not be afraid to follow the developments. If any negative facts are found, then a reasonable buyer will always dig deeper or express their concerns directly to the seller.

2. Can I see certified financial statements of income, cash flows and balance sheets for the last three years?

A business is often valued on a cash flow basis, this will give you additional information on whether it has been overvalued, undervalued or the asking price is fair. A successful buyer will confidently make an offer to buy, even if it is much lower than the seller expects. Experienced buyers always make informed decisions. Remember also that the bank will want to see such documents before granting a loan.

It is also worth asking if the company maintains management accounts. If you are given these documents, be sure to ask about any inconsistencies between management and financial reporting.

3. Can I see the company's tax returns for the last three years?

Make sure the tax returns are for the company and not the owner. Tax returns often give a more accurate picture of a company's finances. As a rule, the company wants to avoid warning the Tax and Customs Services about any violations. If funding this business is part of your plan, your bank will want to review these documents before considering providing you with the capital you need.

Also, buyers should be aware that completed invoices and tax returns may be legitimate, but obscure the real picture of the business. For example, in the presence of "relatives" enterprises, transfer pricing can be used to significantly change the cost of goods sold, which, in turn, will affect profits.

4. Can I see a copy of all documents relating to outstanding debts, including accounts payable, property and equipment?

These documents will give you an idea of the company's cash flow and therefore the total value of the company. In addition, any late payments may be an indication that the business is struggling to stay afloat or that its relationships with other suppliers may be in poor shape.

They will also give you a better idea of how the company's financial affairs have been conducted in previous years. For example, you may find that a company has a bad deal to rent space, or that it has an excess of unused equipment in its warehouse. You should definitely request original accounting documents and reports. This will help you get a better idea of the company and how the bookkeeping has been done over the past few years.

5. Will a salesperson be around to help with the post-sale transition?

The presence of the owner for some time after the sale will help smooth out the transition period. It is also wise to negotiate some form of compensation for his services during this time. This is not possible in every case, but it is worth checking with the seller as early as possible.

If the seller's fee for his services depends on the company's performance after the date of the transaction, this is called a fee agreement. There are many options, but this type of agreement usually involves the buyer paying a significant portion of the sale price at the time of the transaction. Further, payments are planned, which depend on the performance of the enterprise for a certain period after the sale. Buyout agreements are a common way to structure the sale of a business.

6. Can I speak to staff and managers, or is the sale strictly confidential?

If the latter, then you should ask why employees and/or managers haven't been told this yet. When it comes to a confidential sale, there are a few things to consider. When new owners come in, employees usually worry about layoffs.

If the staff is not aware of the sale until after it happens, how and when you let them know about the acquisition is critical to the smooth running of the business.

If only senior management was informed about the decision to sell the company, then you should ask personally or through the seller how they feel about the situation.

All buyers should understand that the rapid adaptation of staff to new conditions is the absolute key to the success of any business acquisition.

7. Was there a high turnover of staff? If so, why?

If employees regularly leave the enterprise, this can say a lot. Chief among these concerns — that the business is not sustainable at current wages or the amount of work that staff have to do every day.

On the other hand, it can provide the buyer with a quick win in terms of business transformation and securing your lead. It is difficult to keep the company loyal and productive when the owner changes, but solving existing personnel problems from the very beginning will help to win the team over to your side.

Staff loyalty can be increased if you offer bonuses for hard work, attractive company rules, or other similar incentives to encourage key employees to stay.

8. Is there a close relationship between the company and its customers?

Reputation is hard to build. If a company does not enjoy a high reputation with its current customers, this can be a stumbling block in its path to becoming a much more profitable business.  

9. What are the working conditions?

Pay attention to whether employees in the workplace are in any dangerous situations. Does working for the company pose significant health and safety risks? This may be an additional cause for concern for you as a buyer. In such a case, the company will be subject to regular and stringent inspections by health and safety officials. You may need to purchase additional hardware to keep your business fully compliant with current legislation. Employee liability insurance may also be required, which is another cost item to consider.

10. What is the condition of the existing fixed assets owned by the company, such as office equipment, machinery and vehicles?

Finally, information about how well managers, supervisors, and staff maintain the company's equipment, machines, and vehicles. This is an important point for the future of business. Poor maintenance of a company's assets can end up being very costly in the long run, especially if the equipment is vital to the business and needs to be repaired or replaced regularly over time.

These questions are a great starting point in your negotiations with the seller as part of the purchase process. They will be key to creating a comprehensive overview of the business and getting started once you take over.

It is reasonable to entrust the entire process of checking a business before making a deal to professionals in this field, that is, business brokers.  Before a purchase, a thorough analysis and assessment of all risks and opportunities should be carried out, and this work should be entrusted to the appropriate specialists. One of such professional teams operating in the international market, — this is Russian-Eurasian Business Broker (REAB).