10 Questions to Ask Before Buying a Business
So you're considering buying a business. But is it really the right move?
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Many experts are predicting that a huge wave of businesses will become available over the next decade or so as baby boomers look to sell. As the economy continues its climb into a full-blown recovery (we hope), it just might be the perfect time for you to fulfill that lifelong dream of buying a business. Before you take the plunge, however, you should take the time to ask yourself a series of questions that will help make sure you're prepared for the rigors of business ownership. Certainly the team of advisers you assemble to make such a deal—such as business brokers, attorneys, and accountants—can help you in determining the value of a business and what you should pay for it. But there are additional questions you need to ask yourself, and the seller, to find out if the business you've targeted is everything it's cracked up to be. With that, here is a list of 10 questions (in no particular order) that you should get answers to before buying the business of your dreams.
1. Is buying a business the best decision for you right now?
Perhaps the most important questions to start asking involve whether buying a business is a good fit for you, says Keith Emmer, principal at Startegix in New York City. "If you're just bored or looking to try something, what happens when you have to do the tedious tasks that every entrepreneur must do?" asks Emmer. If that's the case, you might want to consider a hobby instead.
If, on the other hand, you see real opportunity and have always tended to see the world a little differently than others in your corporate job, owning a business may be right for you. "At the same, you should ask yourself if right now is the best time to make the commitment to buy if say, you're almost vested in your retirement plan," says George Krueger, president of Bigg Success, a business education and consulting firm in Champaign, Illinois. "It's probably a small sacrifice to get the full benefit of your employer's contributions," he says. "You can use the time to get prepared to buy a business."
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2. Will your spouse support you?
Owning a business will affect your relationship with your spouse, in one way or another, says Krueger, since both of you will need to make the emotional and time investments that come from riding the entrepreneurial roller coaster. "So your spouse has to be prepared mentally and emotionally as well," he says. "If not, you may find that your biggest challenge comes from home rather than your business." You need the physical capacity to work long days, especially in the early days.
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3. Who runs the business when the owners go on vacation?
One interesting question to get an answer to involves asking when was the last time the sellers went on vacation, how long were they gone, and what kinds of problems happened when they were away, says Kent Boehm, a business coach in Alberta, Canada. That helps determine how tied the business owner is to the day-to-day operation of the business. "The more often the owner goes on vacation the better quality of life they have," says Boehm. "The problems that occur while on vacation are sometimes an indicator of how much babysitting the owner has to do."
4. Do the numbers add up?
This one seems obvious, but a lot of new entrepreneurs don't really think about what exactly their return should be, says Krueger. "If you plan to be an absentee-owner, will the business provide a reasonable return on your investment, given the risk?" he says. "On the other hand, if you will be an active owner, will it provide the return on your investment and compensate you adequately for the time you're investing?" Kruger also suggests subjecting the projections you're using to what he calls "stress testing," such as finding out what might happen to cash flow if sales are below your expectations or costs run above your projections? "Bankers often see if you'll be able to pay them back if profits are off by 25 percent," he says. "You should run similar scenarios."
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5. Are there any other skeletons to worry about?
You'll also need to do your homework when it comes to finding out everything beyond the numbers that might affect your new business, says Chantay Bridges, a senior real estate specialist with Clear Choice Realty & Associates in Los Angeles. He suggests finding out answers to the following questions.
- Are there any easements, exclusive rights, or right of ways that impact the business?
- Has the business ever been a crime scene or has it been vandalized?
- Has the seller run into any trouble with the state, government, or IRS?
- What is the business zoned for? Is the area hazardous?
