Without a doubt, buying your first business can be an intimidating process. We’ve produced a checklist of vital enquiries you should make to simplify the process.
Why are they selling their business?
You may expect to hear the seller wants a different challenge, plans to retire, or maybe has health issues – all of which may stack up within the context of all you see and hear. But if the present owner is looking to exit the sector when the business income seems to be falling away, or if new entrants are starting to build their own presence in the market, these are clearly factors that will need to be carefully investigated.
So how will you judge the truth of what you’re being told? Unfortunately, you can’t really make a definitive judgement. However, an experienced due diligence team should be able to test the seller’s official position against the tale told by the financial records. So, don’t be afraid to get a professional second opinion to investigate.
What’s included in the sale?
This question encourages a response beyond a mere listing of assets. It also makes it easier for you as a potential buyer to ask to hear more about anything mentioned. Furthermore, even though the components of the sale will be noted in the particulars, this enquiry invites the owner to ‘sell’ the business.
Hearing the kind of pitch they deliver to describe the enterprise they have nurtured over the years should tell you far more than any catalogue description.
How did they arrive at the asking price?
Of course, your team will produce an independent valuation of their own if you decide to progress your purchase discussions. Nevertheless, it can be very instructive to hear an explanation about how the seller’s valuation has been calculated.
The figure could be based on income capitalisation, total value of assets, takes a multiplier approach or it could use some other method appropriate to your sector – the more insight you can gain, the better. It’ll give you an idea of what the seller prioritises as valuable to the business as well as extra info to negotiate.
What outcomes is the seller looking to achieve?
You might assume the seller is hoping for a really good price. However, in many sale negotiations the vendor may have a menu of aspirations, especially if it’s a potential ‘retirement’ sale.
For example, a departing owner may be keen to see the business expand or they may wish to see a certain trading style retained. They may also be seeking reassurance that any new owner will want to keep the existing workforce and has no plans for large-scale redundancies. In such circumstances, any buyer prepared to meet some of the seller’s proposed outcomes may thus find it easier to negotiate a slightly lower selling price.
Are they willing to commit to a non-competition agreement?
As a prospective new business owner, you will want to be sure the present owner is not planning to set up a rival business sometime after the sale has taken place. Such an enterprise would not just be a potential commercial rival, but the amount of ‘insider’ knowledge available to that business could also threaten to poach your customers and your supplier relationships. Any agreement will, of course, be time-related and must also specify the geographical limits which apply.
Is the business consistent throughout the year or does it experience seasonality?
Many businesses have peak periods when customer demand is at its highest, such as weatherproof clothing during the winter months. But some businesses, such as floristry, may have more subtle busy times related to special occasions like Mother’s Day and Valentine’s Day.
And with certain food-related businesses, such as restaurants, the source of supply may vary according to the time of year. Stability throughout the year will be easier to accommodate, whereas seasonality usually requires more careful business planning.
What are the biggest challenges currently facing the business?
Any genuine business owner will outline the market challenges they face. After all, business rivalry and trying to negate economic disadvantage are recurring trading problems and a frank discussion should yield some sound strategic advice for the future.
Just beware of any seller who can’t offer a convincing response or wants you to believe you’re buying a licence to print money.
In addition to this list of largely generic information, you will of course have some sector-specific questions of your own you will wish to ask. However, these prompts should give you a head start when you reach that important stage of assessing your best purchase options.
Jo Thornley is head of brand and partnerships at Dynamis.
Buying a business on a budget: what are your options?