The REAL Questions You Should Ask When Buying a Business
Updated on September 28, 2021
When buying a business, one of the most important things you can have in hand is a list of questions that reveal the nitty-gritty details of the business you hope to acquire.
This list might be your almighty due diligence checklist, aka your ultimate guide to the obvious things to look for and hidden details on a business you are looking to take over.
Not every deal is the right one, even if the finances and traffic look great on paper. You need to dig a little deeper beyond the typical and ask the right questions to make your due diligence worthwhile.
If you’ve ever caught yourself wondering what to ask, wonder no more. We’re here to help you sort out the real questions you should be asking sellers.
If you want to find vetted and profitable online businesses, register for a free marketplace account today.
Here are the questions you won’t want to miss asking as a buyer.
Why are you selling?
This might seem obvious, but it’s an important starting point in the due diligence process. Understanding a seller’s motivation to sell reveals a lot about a business.
Usually a seller sells for a combination of personal and professional reasons. They may want the cash to buy a house or pursue another business venture. They could just want their time and energy back to take an early retirement.
Sometimes sellers have maxed-out their ability to run the business or are finding themselves unable to keep the business profitable. It’s good to determine whether a seller is jumping ship because of new competition or because of a declining market, so you can better assess if this is the right opportunity for you.
Whether the seller claims the business is doing well or poorly, make sure there is a solid history with financials to back up their story.
While on the topic, it’s worth asking ‘What will you do if you can’t sell?’ to see if the seller has a backup plan. If they don’t feel confident that they can hold on to the business and keep it profitable, you might want to think about whether you’d be in the same position.
What skills or qualities do I need to run the business?
Any buyer, especially new ones, will need to take stock of what skills they have that could help them run the business.
Ultimately, you’ll need the right skill set to keep the business going and to scale your income.
The seller can share what skills they think are necessary and even what skills they lack that the business could use to become more profitable. Their answer here could help you map out if you have the right skills to grow the business.
What would you have done differently?
This is one of our favorite questions we ask in our Real Money.Real Business interviews – a podcast where we get real stories from large and small business owners.
The question opens the floor for the seller to reflect on what they could have done better and give advice to future buyers.
It will allow you to look at different directions and new opportunities you can take the business in.
It also helps you prepare for potential challenges should the same problems arise.
While it’s never comfortable to think about the previous owner’s mistakes or biggest challenges, it should give you some peace of mind that they overcame challenges and pivoted the business, in case things change for you.
How did you determine the sales price?
If you are buying off a trusted marketplace, this is one of the key questions you’ll want to ask a seller.
If you are buying directly from the seller, don’t be afraid to dig deep on their valuation of the business so you can confirm that you’re getting a fair price.
Alternatively, by working with a broker like us, we take care of that valuation for you. You can learn more about how valuations work here or directly generate a valuation for a business with our quick and easy valuation tool.
How are finances recorded?
It’s absolutely critical to see the seller’s profit and loss (P&L). These financial statements and balance sheets are the hard numbers on how the business is doing.
Understanding how the business records their accounting will help you determine how revenue is increasing or decreasing. Along with these financial statements should be documentation of tax returns for previous years.
Don’t forget to ask how much the seller is taking as a salary as well, since this can skew the numbers.
How well documented are procedures?
Even small businesses need standard operating procedures (SOPs). The current owner should have some in hand if they were being proactive in their operations.
SOPs are important because they show how easy or difficult the business is to run. If the SOPs are hard to follow, either the business is going to be a challenge to operate or the business owner needs to simplify and improve their procedures.
You should try to have SOPs handed over to you because when you buy the business, you can immediately delegate or outsource if processes are documented. You’ll also be able to hit the ground running as soon as the business is transferred to you.
Are there any pending lawsuits or issues?
It’s a huge barrier to entry if the business has any ongoing lawsuits. Lawsuits can be common in the online business world because it’s difficult to track and protect copyrights and intellectual property.
It’s also common for businesses to be hit by penalties from an ad network, Google, or from violations of Amazon’s terms of service. If the business has been hit by Google penalties or has any banned Amazon listings, this hampers its ability to function as a business.
However, not all penalties are dire and many businesses bounce back from them.
If the seller isn’t upfront about any legal issues, it’s not worth pursuing the deal further.
Profitability won’t matter if you have a lawsuit on your hands, so ensure that any legal matters are completely settled before buying the business.
What are the potential opportunities?
All business buyers should head into a deal with a clear vision of how to grow their newly acquired business. One of the best ways to map out growth potential is to ask sellers themselves where they see the greatest opportunity.
Ask the seller how scalable they think the business is, and what they would do if they were going to keep the business longer and grow it themselves.
While the P&L reveals the true numbers, it’s important to ask how much capital is needed to scale. The seller will be the subject matter expert on this subject.
With the data in hand and advice from the seller, you should be able to accurately project how much you could grow your bottom line.
What is the current market like?
You’re going to want a clear grasp of who your target audience is.
Your audience may be directly related to your niche. For example, your business niche may be wellness and your customer base is yoga enthusiasts. Ask the seller and do your own research to determine whether you’re getting into a growing, shrinking, or stable niche.
Critical to understanding your market is knowing who your competitors are. If the landscape is getting increasingly competitive, that will endanger your ability to make it, so get the clearest picture possible of the market before stepping into business ownership.
How does the business generate money?
This is an important question in the case of businesses with multiple revenue streams.
For example, this might break down to a majority of revenue being generated by affiliate marketing, and the remaining income being generated by ecommerce.
A seller or a trusted broker should lay out which revenue stream brings in what percentage of income so you have a clear vision of how the business earns.
What do you do in terms of marketing?
This is a great question to ask to learn what’s working for the business and where the business could expand its marketing efforts.
Make sure to explore with the seller which traffic channels are strongest, whether it’s social media or paid ads. Also, ask them if they’ve tried any alternative marketing strategies like influencer marketing or building out a video presence, so you’re clued in on everything they’ve tried.
The goal here is to draw up a business plan that has diversified traffic channels to mitigate risk. If the seller hasn’t tried a lucrative channel like email marketing, then you know what your first marketing task is when you buy the business.
What assets or liabilities are included in the sale?
A business always includes more than meets the eye. The assets the business owns are crucial to understanding the value of the business and what you’ll be gaining in the deal.
Obvious assets might be the domain, relevant ad or affiliate accounts, employee contracts, or SOPs.
Others are lesser-known but just as important to clear up with the seller.
Ask them if the business has intellectual property and if they will be transferring ownership rights to that property. From a legal perspective, you’ll want to know if there are any licenses or permits from any industry organizations. In the case of physical assets, get an understanding of whether they own or lease equipment that impacts their ability to run the business.
Less tangible, but still necessary to understand, is what the company’s reputation is and their degree of brand recognition in the market. Ideally, as a new owner, you should be able to continue what the seller has built and maintain relationships with customers.
They might also have assets specific to your monetization. For Amazon FBA businesses, it’s important to know if the Seller Central accounts are included, as this affects your migration and if you’d need to do a listing transfer to another account.
It’s a lot to go over, but an understanding of what assets are in place directly impacts the viability of running the business successfully.
Are you willing to agree to a non-competition clause?
A non-compete can be a make-it-or-break-it component of the deal process.
An agreement that the seller will not try to compete with the business they are selling is crucial to protecting the business. While we have a mandatory agreement in place for at least two years for all deals, not every broker does. It’s incredibly important to do your research on this question.
If they won’t sign a non-compete, this is a red flag. They may be looking to start up a similar business to the one they’re selling to directly compete with you.
Are you offering any support?
Many buyers don’t want to get into a business purchase completely alone. Oftentimes buyers will look towards the seller for a period of support when transitioning business ownership.
Ask the seller if they would be open to helping via phone, email, or video calls when any questions or challenges arise.
Many sellers are happy to do this knowing it helps them close the deal, and most sellers would like to see new buyers succeed with the business.
Outlining a support period allows buyers to ease into ownership. Ask what the seller is open to and agree on the terms before the deal closes.
How many hours do you work in the business?
The hours a seller spends on the business varies vastly in the online business industry.
While most sellers have built their businesses to run with just a few hours of effort a week, you’ll want to keep your eyes peeled for any businesses that seem time intensive.
Buying a business shouldn’t be like buying a job, so get a good picture from the seller of what their time commitment has been to the business.
Who are your suppliers?
Make sure to ask sellers every detail about the suppliers they use.
Get a sense of the relationship with suppliers and how easy they are to work with. A strong supplier relationship can be one of the strongest assets that money can’t buy. If the relationship is good, ask the seller if they would be willing to transfer existing contracts when you acquire.
You should also know if there are multiple suppliers you will need to source from. Take things a step further and ask the seller if they depend on a key customer or vendor, as any problems with a key player could sink operations.
You’ll need a deep understanding of inventory management so you know what your cash flow looks like for ecommerce and FBA businesses. You should clear up what the inventory levels are and if there is any dead inventory at the time of acquisition.
Also, keep in mind you’ll need enough working capital to reorder inventory when you buy the business.
Are there any employees?
If the business has any employees, ask the seller if they will be continuing with the business post sale.
In the case of long-term or key employees, understand if any benefits are offered and if their wages compare to industry average.
Should the business come with a large team, ask about the turnover rate and what the current company culture is like. If the employees are happy and want to continue on with the business, ensure that their contracts will be turned over to you as the new owner.
Are you open to negotiation?
The asking price for a business is always negotiable – if you ask.
Start with asking if seller financing is available for the business or if the seller would be open to an earn-out. If the seller is motivated to close the deal soon, they might agree to an earn-out to help you finance the deal.
With the right open dialogue, both sides can foster trust in the deal process.
What is my exit strategy?
Buying a business can lead to a lucrative, passive income stream.
But in order to get there, you have to ask the right questions and put a strong plan or exit strategy in place to work towards.
A piece of digital real estate may be a bit of work to take on. However, the right mindset and understanding of what you’d like from the business can help you close the perfect deal.
To get the ball rolling, register for a free marketplace account to start searching through profitable online businesses.
If you want some help, you can also set up a free 30-minute criteria call where our business advisors will find businesses that suit your skills and needs.
When that time comes, ask yourself the important questions. For example, do you want to work alone in the deal process or would you want to use a broker to do the heavy lifting for you?
Ask the right questions to the seller, and of yourself as a buyer, and you’ll be set for success.
