Questions a Buyer should ask the Seller when investigating the purchase of a business

By Dave Driscoll

Buying a business is probably the most consequential purchase you can make in life. Not taking the time to thoroughly evaluate whether you and the business are suited for each other can result in a bad decision that is financially and emotionally disastrous for you and your family.

When investigating buying a business after execution of a Confidentiality Agreement, it is important to understand the inner workings of the business and realistically qualify interest early in the process. Prior to presenting a Letter of Intent, a prospective buyer should have a conversation with the seller to ask questions about the operations, customer base, employee relations, industry trends, the business’ history, and the owner’s background.

Asking the seller straightforward questions and getting forthright answers in return is an essential part of the buyer’s due diligence process. Posing the “right” questions and actively listening will help the buyer learn and assess important aspects when considering the purchase of a business.

So, what should the buyer ask to promote a substantive conversation with the seller?

First, I recommend determining the seller’s role and motivation by asking:

Why did you get into this business in the first place?
What still excites you about it?
What is your day-to-day role in the business?
What would your ideal transition look like? What do you want to do post-sale?
What are your expectations of a buyer?
What problem does your company solve for your customers?
Why do your customers buy from you rather than your competitors?

These are serious questions that deserve thoughtful, sincere responses. The answers allow the buyer to discern the seller’s true motivation, establish chemistry with the seller, and get the initial “feel of the business.” If the seller does not give serious, satisfactory replies to these questions, the prospective buyer should move on to a different opportunity… pursuing the purchase of the business would not be worth the energy.

The next series of questions clarify how the business works. Establishing trust with the seller prior to asking process questions is essential; otherwise, a seller will not be comfortable providing detailed responses.

Would you walk me through the entire process – from sales and sourcing to distribution and serving the end customer?
Does the business have a comprehensive operations manual?
Beyond the owner, what is the leadership structure and their duties within the company? (This should be based on job titles, not actual employee names.)
How long have your employees been with you on average and why do they stay?
What types of external and internal problems arise in your company regarding production, service, employees, and/or customers?
Who deals with those problems and how?
At what percentage of capacity is the business currently operating?
What capital expenditures should be made in this business annually?
What opportunities do you foresee in this market through the next three, five, or 10 years?

Prospective buyers should be gauging the seller’s sincerity and forthcoming nature, aiming for a broad understanding about how the business runs, as well as a realistic perception of the opportunities and challenges. Supporting that conversation with specific facts should happen in the due diligence phase, after the LOI is accepted.

The questions above have focused on understanding the basics and establishing trust and chemistry between the buyer and seller. After that has been accomplished, another series of questions zero in on providing a roadmap to promote success and avert disappointments:

What mistakes have you made and how can I avoid repeating them?
Are there industry associations and resources for advice and counsel on trends and best practices?
On what terms will you be available to assist or mentor me in taking over the business?
Are you personally responsible for relationships with any suppliers?
Are any customer relationships managed by you personally?
How dependent is future success on transferring and maintaining those relationships?
How likely are those relationships to continue after you are out of the picture?
Does the company have intellectual property? If so, how is that protected?
Are logos and business names trademarked? Do they convey with the business?
What marketing and promotional materials support sales?
If relevant, are the business’ inventions patented?

The seller should present five years of organized financial statements. When reviewing the financials, the buyer should ask detailed questions about:

the story the Profit & Loss statement tells about the business operations
the credibility of the source of the numbers
historical and current performance

Establishing trust and respect between buyer and seller early in the process is crucial. Both parties must recognize that this pre-LOI conversation is the foundation for determining the tone of any future negotiations. After the LOI is executed, the buyer will have the opportunity to verify the accuracy of the materials and statements that enticed them to pursue the purchase.

Buyers, use your time efficiently to determine whether you want to proceed toward acquiring the business. Avoid fatiguing the seller. Keep in mind that in addition to participating in the sale of the business, the owner needs to continue devoting their time and dedication to maintaining the business’ value. Some prospective buyers requests mountains of information, meetings, and time, yet can’t make a decision because they are in search of a mythical guarantee – watch out for this “analysis paralysis.”

Asking thoughtful, detailed questions will help determine quickly whether this business is a good fit for the buyer, while also gaining the information needed to craft a Letter of Intent that defines the “essence of the deal.”

Dave Driscoll is president of Metro Business Advisors, a mergers & acquisitions, valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at [email protected] or
(314) 303-5600. www.MetroBusinessAdvisors.com