Evaluating a Business to Purchase - 16 Questions to Ask When Buying a Business

Are you thinking of buying an existing business? There are number of issues you should consider.Get the answers to the following 16 questions during your due diligence review. The answers will help you to determine whether the business is a sound investment.

1. Why is the owner selling?

This could be the most important question of all, and the answer to the question will inform the rest of your due diligence. If the owner is selling because the business is not doing well, try to understand why. If the failure seems to be due to the owner's failure to promote and market the business effectively, or to identify and take advantage of opportunities, determine whether the business can be turned around.

2. What have revenues looked like over the last five years?

Has the business hit break-even? If so, are profits seasonal - such as agricultural sales and services? If losses, how deep were the losses? Can the business be made profitable through better management?

3. What is the outstanding amount of each of the business’ long-term debts?

What is the regular payment amount for each debt? Are any of the debts in arrears? If so, what is the rate of interest accruing on the outstanding balance? Are there additional overdue fees accruing?

4. What is the current status of the accounts payable?

With respect to each account payable, does the business pay net 30, net 60 or some other arrangement? Have any of the payables gone to collection?

5. What is the current total of accounts receivable?

What percentage of the A/R total is over 60 days? Over 90 days? Older than 90 days? What is the business' collections process, and can it be improved?

6. What is the business' bad debt to sales ratio?

You should be concerned if it is higher than 0.45. Lenders prefer ratios of less than 0.4. A rate of 0.3 would indicate a much healthier financial position and a much lower reliance on debt to finance the operations.

7. How large is the customer base?

Does the business maintain a high level of return customers? Is the business reliant on strong customer loyalty? A change in ownership could affect that loyalty if it is a result of long-term relationships between the owner and the customers.

8. Is the current customer base primarily local?

If so, this could indicate that the business location is a factor in attracting customers. Consider how, and if, the business can be successfully marketed to customer segments outside of the local markets.

9. Is a large percentage of the business revenue generated by one or two large customers?

If so, what would be the impact on the business of losing one of these customers? Can the customer base be diversified to spread the revenues over a larger number of customers?

10. What is the growth potential of the business?

What is the market saturation in your area? Is the industry showing growth? How many local competitors have a larger market share than the business?

11. Are you the right person to take on this business?

Does your accumulated experience and expertise lend itself to successfully running this business? This is an extremely important consideration if you are looking at acquiring a business that is operating below its potential.

12. Have you been provided with copies of all existing third party contracts?

What are the business’ current contractual obligations? Does it have written agreements in place with consultants, independent contractors, commissioned sales people, suppliers, employees? Which contracts are coming up for renewal? Which expired or terminated contracts have survival clauses that must be complied with?

13. Has the business ever filed for bankruptcy protection, or has a trustee or receiver ever been appointed?

What caused the business to make the filing? How much of the debt load will you be required to take on? Is the business in a stronger position post-reorganization? Due diligence is key to answering these questions. You must also consider your risk tolerance level.

14. Are there any claims, suits, actions or proceedings pending or in progress against the business?

If so, what is the total of all amounts being claimed? Are there any judgments issued against the business in a court action? If so, for how much? Has the judgment been fully satisfied?

15. Has the business ever been the subject of an investigation, past or present, by a government or law enforcement agency?

If past, what was the result? If present, what is the current status?

16. What is the value of goodwill and intangible assets?

What is the company's brand reputation and recognition? How is the business perceived by the public? Does it offer good customer service? Does it own proprietary technology or intellectual property?