On paper, everything seems perfect. The business has strong financials, a promising outlook, and no apparent skeletons in the closet. You’re reasonably confident that this is a smart purchase to make.
But have you done all the necessary legwork? Do you really know everything you need to know about your new acquisition and whether or not you’re prepared to manage it? It may be worthwhile to take a step back and think things over.
Purchasing a business is a considerable risk, true. But it should be a calculated risk. You should be confident that you stand to benefit from your acquisition excepting circumstances entirely beyond your control.
With that in mind, here are ten questions you should ask before you finalize a deal.
What Industry Trends Should I Know About?
Even if a business appears to have a promising future, it’s essential to understand that external forces are always at play. The market could be on the verge of a significant shift that tanks one or more of the business’s revenue streams. That’s why it’s crucial to research the seller and their business and the industry in which it operates.
Not only will this allow you to prepare yourself for potential pitfalls, but it can also be a means of recognizing untapped opportunities.
How Active a Role Will The Seller Take in the Transition?
If the business you’re purchasing is overly reliant on owner participation, is the seller willing to help ease the transfer of ownership? Are there process documents that you can leverage to understand better what you’re getting into? Is the owner actively engaged in ensuring their business thrives under your ownership, or do they seem to be almost entirely checked out?
What Potential Opportunities Exist for the Business?
Once you’ve purchased the business, how do you intend to improve it? Maybe there are market segments the original owner failed to address. Maybe there are growth opportunities that leverage other businesses in your portfolio.
Either way, this is something you need to consider before signing off on a letter of intent.
Do I Have (or Need) An Exit Strategy?
Do you intend for this business to generate consistent revenue in the long term, or do you plan to improve it and eventually sell it off? If you’re in the latter camp, you’re going to need to start planning your exit before any money changes hands. And even if you don’t have any concrete plans to sell, it may still be in your best interests to at least consider an exit within the next several years.
Your exit plan should cover the following:
- What you want to achieve with this business, both before selling it and as a result of the sale.
- When you plan to make your exit.
- The current value of the business and how you intend to increase it before selling.
- The business’s core value drivers — what makes it worth purchasing?
What’s My Business Plan?
If there’s one piece of wisdom I can give about running any business, it’s that you should never go in without a plan. Even if you’re positive you’ve no intention of exiting post-purchase, you’ll still need a clear roadmap of what you want to accomplish. This will generally comprise the following:
- A description of the business and its core purpose. The seller should be able to provide this.
- An analysis of the market, including industry trends.
- An analysis of the business’s current competitors and their unique selling points.
- A framework for the business’s management and leadership structure.
- A detailed list of products and services.
- A marketing plan, including paid advertising and social.
- An analysis of the business’s current and future financial outlook.
Do I Possess The Necessary Skills to Successfully Run This Business?
Did you know that Amazon has a video game division?
It’s not as successful as Prime Video, Amazon Web Services, or the Amazon marketplace, and with very good reason. The division’s current leadership has no experience in the industry. Rather than running it as a game company, they’re running it as a generic software company.
I’m certain the executives responsible for running the division are incredibly talented and business savvy in their own right, but that doesn’t mean they’re suited for their current position. Similarly, no matter how good you are at what you do, there are certain businesses you simply aren’t suited for.
As such, before you make your deal official, take a careful inventory of your knowledge, talents, and skills.
Can I Afford This Acquisition?
If, in the worst-case scenario, the business you’re purchasing tanks, what happens to you?
If the answer is that you’ll be financially ruined, then it may not be in your best interests to make the acquisition. You need to ensure that, even if your purchase doesn’t pay off, you’ll still be alright in the long run. Again, it’s about taking calculated risks, not foolish ones.
What Advice Can the Seller Offer Me?
Is there anything the seller didn’t know when they started? Anything they would do differently if they had the chance at a do-over? Any knowledge they can share with you?
Don’t be afraid to ask — an engaged seller will be happy to answer.
How Do The Business’s Employees Feel About the Sale?
Are the business’s employees aware of the upcoming sale? If so, how do they feel about it? Will you need to replace key staff after your purchase, or will everyone stay under new leadership?
Am I Fully Prepared for This Acquisition?
I’ve saved the most important question for last.
Why are you purchasing this business? Is this a commitment you’re genuinely prepared to make? Do you have the time, energy, and resources to ensure the business will thrive under you?
No Foolish Questions
Purchasing a business of any kind is a huge commitment. You need to ensure it’s one you’re fully capable of honoring. By answering the questions above, you’ll know for certain.
About the Author
“Christopher Moore is the Chief Marketing Officer at Quiet Light, which specializes in helping clients sell their internet-based businesses. Additionally, he founded Gadabout Media LLC to inspire, educate, and unite others by creating visually stunning content for clients.”