10 Key Questions to Ask When Buying a Business

Buying a business can feel overwhelming. With so many choices and a lot at stake, it can seem impossible to know which deal you should pull the trigger on. However, if you know the right questions to ask when buying a business, it becomes much easier to identify promising investment opportunities. 

In this article, we discuss ten key questions that can help you gain a better understanding of which business is the right fit for you. We also discuss why due diligence is an essential part of the acquisition process, as well as steps you can take to maximize the chances of a smooth transition. 

By following this framework, you’ll be in a better position to acquire a great business that you can continue growing for years to come.

The Importance of Proper Due Diligence When Buying a Business

A business might look good on paper, but it isn’t until you look at the details that you really understand whether or not it’s a good investment. Due diligence allows you to understand the business on a deep level so you can make an informed acquisition decision.

In a business acquisition, due diligence refers to the period when the buyer seeks to verify all of the information presented by the seller. Typically, it involves examining third-party documentation that corresponds to the profit and loss statements provided by the seller.

Third-party documentation

Third-party documentation can include bank statements, Amazon Seller Central reports, Google analytics reports, and ad platform reports. Of course, each business is different, so the specific third-party records you ask for may vary from business to business. For example, Amazon Seller Central reports are only relevant for FBA businesses, while Google analytics reports only apply to businesses that use Google analytics. In most cases, you’ll want to verify the business’s assets including intellectual property, human resources practices (if applicable), existing employees and employee contracts, and overall business success. 

“Due diligence allows you to understand the business on a deep level so you can make an informed acquisition decision.”

While due diligence is the process of examining the business’s most intimate details, the discovery process starts long before you commence due diligence. During your initial review of the marketing package, you’ll have the opportunity to gain a broad understanding of the business’s operations. 

Once you speak with the seller directly, that’s when you should start asking the right questions to evaluate the opportunity. By the time you reach due diligence, you’ll already have a clear understanding of the business’s strengths and weaknesses. You’ll know how the business stacks up against BBB standards, what opportunities it faces, and what risks you should be concerned about. You’ll also have an idea of what it might look like to transition staff and ownership.

Because due diligence is both important and complex, it’s often wise to hire a professional due diligence firm to help with the process. This is especially true if you’re acquiring a larger business with many moving parts. The following video goes into more detail about the importance of due diligence, as well as steps you can take to ensure that everything goes smoothly.

Questions to Ask When Buying a Business

When you start having conversations with a seller, you should have two goals in mind. One of your goals should be to ascertain the pertinent information that can help you determine whether or not you’re looking at the right business for you. And second, you should seek to build rapport and establish a positive relationship with the seller. 

Establishing mutual trust and respect makes the acquisition process smoother and more enjoyable for everyone involved. Not to mention, if the seller likes you, there’s a better chance they’ll accept your offer.

What is their business’s story?

Everyone likes to talk about themselves, and successful entrepreneurs are no different. Asking the seller about their business’s story is a great way to establish a personal connection right off the bat.

As the seller shares their experiences building the business, pay close attention. More than likely, their answers will provide key insights into how the business delivers value, what areas the previous owner excels at, and where there might be room for improvement. Even if revenue and net profit isn’t discussed yet, you’ll have a great foundational understanding of the business you’re considering acquiring.

“Establishing mutual trust and respect makes the acquisition process smoother and more enjoyable for everyone involved.”

When the seller is finished, be sure to comment on their journey. If they can see that you appreciate their effort and skill, you’ll immediately build rapport. On the other hand, if they think that all you care about is their asking price, that could have the opposite effect.

Why are they selling the business?

There are many reasons that business owners decide to sell, and each reason can have different implications. As a prospective buyer, you want to know why they’re selling. A few reasons a small business owner may choose to sell include:

• They want to pursue another opportunity, such as starting a new business
• They’re no longer passionate about the business
• The business’s requirements exceed their abilities
• They aren’t able to invest the capital required in order to scale
• The current owner believes that the market is declining

Of course, if the owner is selling because of one of the first three reasons, the business might be in great shape. If the seller feels that they’re no longer capable of growing the business, you might want to dig deeper to understand why that’s the case. Once you’re in charge, you’ll be responsible for filling that void, so you want to know what you’re getting yourself into upfront. 

“There are many reasons that business owners decide to sell, and each reason can have different implications.”

Some businesses, especially in Ecommerce, can encounter cash flow hurdles that can only be solved through access to more capital. In such a situation, a small business might be perfectly healthy, but it still needs more money to scale. In other cases, cash flow issues might be indicative of something more concerning such as declining revenue and profits.

If the market is declining, that’s a big red flag. A seller might not tell you that’s what’s happening, so it’s your job to read between the lines. 

Asking “why are you selling the business?” also provides you with an opportunity to gauge their level of transparency. If their business has a steep, negative revenue curve and they don’t acknowledge it, then it suggests they might be hiding something. On the other hand, if they respond by telling you exactly what failures have led to the decline, it instills a certain level of confidence. Not to mention, knowing about the challenges is an important part of course correction. 

What are the business’s strengths and weaknesses?

To understand what you’re getting yourself into, you need to know the business’s strengths and weaknesses.

Most sellers love talking about their business’s strengths and opportunities. When you ask about strengths, don’t be surprised to hear, “YES, there’s enormous growth potential!” That might be true, but it’s important to follow up to understand the details of the opportunities they mention. 

When evaluating opportunities, you should also think about what resources it might take to capitalize on the opportunities. For example, if you’re looking at an Amazon business growth strategy, do some calculations to understand the cash flow requirements, and then compare them to your budget. Make a list of all business opportunities so you can evaluate them more closely.

When it comes to weaknesses, it’s far preferable to work with a seller who is transparent. As mentioned above, if the business has negative trends, the seller should be able to tell you why that’s the case.

“To understand what you’re getting yourself into, you need to know the business’s strengths and weaknesses.”

If the seller is resistant to discussing threats or weaknesses, you should be wary. One of the last things you want is to encounter unpleasant surprises during the transition process. Unfortunately, that can happen if you fail to ask the right questions and the seller isn’t transparent.

The good news is that when you buy an existing business through trusted Advisors or business brokers, they will have already impressed upon the seller the importance of transparency. While you should always go thorough due diligence, knowing that a trusted Advisor or business broker is involved can go a long way to instilling confidence.

What skills does the owner need to have?

If you’re going to be the person running the online business, it’s a good idea to know what’s expected of you. Therefore, it’s important to ask the seller what their day-to-day activities look like.

If you don’t have all the same experiences and skills as the current owner, that can be okay in many cases. Typically, the seller will agree to provide a clear business plan, as well as train you after the sale. Additionally, there’s always the possibility of hiring an expert to carry out key roles that you aren’t interested in taking on. 

How many hours per week do they work in the business?

There are significant variances in how much time business owners work in their business. Before moving forward, you want to know exactly what you’re signing up for.

If you’re interested in working full-time in the business, then there are more opportunities available to you. On the other hand, if you’re looking for a website that provides passive income, then you want to identify a small business in which the current owner has a minimal workload. This question can really help guide your search. 

The caveat to this is that it’s often possible to offload many of the owner’s responsibilities to employees or contractors. Of course, you’ll need to account for the cost of doing so, but that can be a great way to reduce your workload if that’s your goal.

Financial Records to Ask For When Buying a Business

In the previous section, we discussed questions that reveal opportunities and weaknesses, as well as what’s required to succeed as the new owner. In addition to those more ‘general’ points, you also need to get into the weeds and look at the details. You don’t need to be a complete expert in business finance, but a general understanding is essential.

Profit and loss statements

Profit and loss statements reveal the business’s story on a deeper level. They provide you with a clear understanding of key trends that have implications for the business’s future.

It’s important to see financial statements on a monthly, accrual basis. These allow you to see the greatest level of detail. If you’re buying through an Advisor, the Advisor will have already worked with the seller to create these financial reports. These will also be used to help you understand how you’ll repay a loan if bank financing is involved.

Revenue and expense reports

Revenue and expense reports can provide a more granular view of the business’s revenue and expenses. While the P&Ls provide much of the crucial information, revenue and expense reports can go deeper.

For example, ad cost reports can give you insight into which campaigns are delivering the greatest results. For FBA businesses, there are a variety of Seller central reports that can provide invaluable data that goes beyond gross sales. All of these are items that valuation calculators cannot account for.  

It’s important to note that the seller may have their own financial report requirements for you. Depending on the size of the deal, you may need to provide documentation for proof of funds. 

Operations and Legal Obligations to Ask About When Buying a Business

Operations and legal obligations are two additional areas that you should ask about when buying an existing business.

Business operations

Every business is different, so you always want to understand how the business operates before moving forward. If the seller has done a good job preparing to sell, they’ll have well-organized operating procedures to make it as easy as possible to transfer business ownership.

Legal obligations

Make sure that you’re aware of any legal obligations before buying an existing business. Does the business require a certain threshold for liability insurance? What about licenses or disclosures for the products it sells? Asking each important question upfront can help you maximize the chances of knowing all relevant information before making your purchase decision.