10 Questions to Ask Before Buying a Business

 10 Questions to Ask Before Buying a Business

Many experts are predicting that a huge wave of businesses will become available over the next decade or so as baby boomers look to sell. As the economy continues its climb into a full-blown recovery, it just might be the perfect time for you to fulfill that lifelong dream of buying a business. Before you take the plunge, however, you should take the time to ask yourself a series of questions that will help make sure you're prepared for the rigors of business ownership. Certainly the team of advisers you assemble to make such a deal—such as business brokers, attorneys, and accountants—can help you in determining the value of a business and what you should pay for it. But there are additional questions you need to ask yourself, and the seller, to find out if the business you've targeted is everything it's cracked up to be. With that, here is a list of 10 questions that you should get answers to before buying the business of your dreams.

1. Is buying a business the best decision for you right now?
Perhaps the most important questions to start asking involve whether buying a business is a good fit for you, says Keith Emmer, principal at Startegix in New York City. "If you're just bored or looking to try something, what happens when you have to do the tedious tasks that every entrepreneur must do?" asks Emmer. If that's the case, you might want to consider a hobby instead.

If, on the other hand, you see real opportunity and have always tended to see the world a little differently than others in your corporate job, owning a business may be right for you. "At the same, you should ask yourself if right now is the best time to make the commitment to buy if say, you're almost vested in your retirement plan," says George Krueger, president of Bigg Success, a business education and consulting firm in Champaign, Illinois. "It's probably a small sacrifice to get the full benefit of your employer's contributions," he says. "You can use the time to get prepared to buy a business."

2. Will your spouse support you?
Owning a business will affect your relationship with your spouse, in one way or another, says Krueger, since both of you will need to make the emotional and time investments that come from riding the entrepreneurial roller coaster. "So your spouse has to be prepared mentally and emotionally as well," he says. "If not, you may find that your biggest challenge comes from home rather than your business." You need the physical capacity to work long days, especially in the early days.

3. Who runs the business when the owners go on vacation?
One interesting question to get an answer to involves asking when was the last time the sellers went on vacation, how long were they gone, and what kinds of problems happened when they were away, says Kent Boehm, a business coach in Alberta, Canada. That helps determine how tied the business owner is to the day-to-day operation of the business. "The more often the owner goes on vacation the better quality of life they have," says Boehm. "The problems that occur while on vacation are sometimes an indicator of how much babysitting the owner has to do."

4. Do the numbers add up?
This one seems obvious, but a lot of new entrepreneurs don't really think about what exactly their return should be, says Krueger. "If you plan to be an absentee-owner, will the business provide a reasonable return on your investment, given the risk?" he says. "On the other hand, if you will be an active owner, will it provide the return on your investment and compensate you adequately for the time you're investing?" Kruger also suggests subjecting the projections you're using to what he calls "stress testing," such as finding out what might happen to cash flow if sales are below your expectations or costs run above your projections? "Bankers often see if you'll be able to pay them back if profits are off by 25 percent," he says. "You should run similar scenarios."

5. Are there any other skeletons to worry about?
You'll also need to do your homework when it comes to finding out everything beyond the numbers that might affect your new business, says Chantay Bridges, a senior real estate specialist with Clear Choice Realty & Associates in Los Angeles. He suggests finding out answers to the following questions.

Are there any easements, exclusive rights, or right of ways that impact the business?

Has the business ever been a crime scene or has it been vandalized?

Has the seller run into any trouble with the state, government, or IRS?

What is the business zoned for? Is the area hazardous?

6. What do the customers have to say?
A step that many business buyers fail to take is talking to current customers in the business, and not necessarily the ones that the seller handpicks for you. "Unless you know who buys from you and why they buy from you, you will be flying blind," says John Torrens, a veteran entrepreneur who also teaches entrepreneurship at Syracuse University. "This is good to know before you engage in a letter of intent and is especially important during due diligence. What you find out can help you if you take over the controls."

7. How does the business make its phone ring?
Obviously, any business needs to have a growing customer base to be successful. So it might be worth asking the seller about what kinds of things they have done to market their business and to generate inquires from new prospects, says Boehm, at least so that you know what you might need to do more of once you take over. "Ask them if they know which marketing efforts create the most leads," he says. "What you want to try and find out is what marketing they are doing, if any, and how effective it is."

8. Why is the seller really getting out?
The seller knows his or her business better than you do, says Krueger. That's why you should make the time to ask him or her about why they are selling. The rub, however, is that you'll usually hear reasons like "retirement," "health reasons," or "other opportunities." Your challenge, Krueger says, is to find the real reason. "You may never find out, but you should certainly try," he says. "Build a relationship with the seller and be thorough in your due diligence."

9. Will the seller keep some skin in the game?
Working with a bank or lender is an important step in buying your new business. But, with credit tight these days, it's not uncommon for sellers to step up and finance at least part of the sale, even though they would all prefer an all-cash deal. If you can get your seller to put their money on the line, it may serve as a signal of the seller's confidence in the future of the business, says Krueger. "Remember that they know more about their business than you do," he says. "If they're not willing to let any money ride on the business, should you?"

10. What is your exit strategy?
This is an important question to ask even as you make the decision about whether to buy a business or not, says Alex Corrigan, who heads up the M&A practice at Delap, a 78-year-old accounting firm in Portland, Oregon. "This should be considered right from the start because," Corrigan asks, "what if you have to sell the business or get out sooner than you thought?" Along the same lines, he suggests that you should also have a buy-sell agreement in place if you happen to have any partners involved in the business.

Tips for Business Owners on Retirement Planning

'I'll never retire' is a common refrain among ambitious entrepreneurs, but the fact is you are likely to decide to at some point. Here's a look at how to plan for that day.

Saving for retirement is tough. For one thing, there's no way to know exactly how much you'll need to save. All you can do is make your best guess based on your situation and goals.

Traditionally, financial planners and retirement calculators suggest you'll need 70 percent (or 80 percent or 100 percent) of your pre-retirement income to maintain your current lifestyle. This doesn't make much sense.

Say, for instance, you earn $80,000 a year but spend $70,000. If you based your retirement needs on your income (70 percent of $80,000 is $56,000), you'd fall short of supporting your current lifestyle. But if you earn $80,000 a year and spend only $35,000, basing your retirement goals on your income might lead you to save too much, meaning you could have used that money to enjoy life when you were younger.

68 percent Workers who report that they have saved for retirement

56 percent Workers who report that the total value of their savings and investments is less than $25,000

36 percent Workers who expect to retire after age 65

74 percent Workers who plan to work for pay in retirement

How Much Should You Save?
Instead of basing your retirement needs on your income, base them on your spending patterns. Your spending reflects your lifestyle; your income doesn't. But how much should you save?

According to the Employee Benefit Research Institute's 2010 Retirement Confidence Survey, 49 percent of retirees spend less in retirement than before (23 percent spend much less) and 37 percent spend about the same. Only13 percent spend more in retirement--and of those, 6 percent say their expenses are only "a little higher."

Sure, you will need a sizeable nest egg for retirement--especially if you plan to travel or play golf every day. But don't be snookered by the constant refrain that you need to save 70 percent of your pre-retirement income to retire well.

Retirement Calculators
There are hundreds of retirement calculators across the web, and each is a little different. No one calculator is necessarily better than any other, but these are especially handy:

• The T. Rowe Price calculator bases its results on your spending, not income.
• The Motley Fool has two useful calculators. One estimates your retirement expenses and the other lets you see if you're saving enough.
• Choose to Save's ballpark estimate tool can be used online or off. (But its numbers are based on income, not expenses.)
• FireCalc.com may seem overwhelming at first, but it'll give you an idea of how safe (or risky) your retirement plan is based on how it would have fared in every market condition since 1871.

Looking at the results from one calculator isn't very useful. But by comparing numbers from several, you'll get an idea of how much to save for the retirement you want. If you're lucky, you may even have enough to spend your mornings on the golf course.

Remember, as a business owner you own an asset, be sure to include the sale price of your business into your net worth and retirement plan. Have an exit strategy in place, and be sure to get a “Broker’s Opinion of Value” to ensure you have a grasp on the true value of your business when you are looking to retire and ready to sell.

Misconception for Small Businesses

So many people assume that when there is a recession that small business must shrink. Not only does the small business market offer continued growth during a recession, it also offers relative stability. Take a look at the growth rate of the small business market versus that of consumer spending.

Consumer spending sports impressive growth rates during the best of times but also suffers big swings during recessions. Conversely, the small business market offers a more stable source of revenue through good and bad economies. Year after year changes in the small business growth rate are less than a third of the drops seen in discretionary consumer spending.

Small business is not only an important source of diversification for enterprise companies but also a relatively safe haven for investments during recessions.

What Can Investor/Entrepreneur Do to Attract and Execute a Successful Acquisition?

Critical Success Factors in Value Definition
Financial Discussion Points

I. Understanding the Financial Statements
A. Balance Sheet
B. Income Statement
C. Statement of Cash Flows
D. Footnotes to Financial Statements
II. Operating Plan-Financial Projections: 3-5 Year Vision
III. Systems—Accounting and Management Reporting
IV. Tax Compliance Issues
V. Review of Accounting Policies
VI. Stock Valuation Issues for Option, Warrants, Funding Rounds
VII. Tax Carryover Attributes
VIII. Integrations Steps and Processes

How does the softening economy affect business brokerage?

With the economy softening, you would think that business would be slowing down.

What I have noticed for the last few months is that there are fewer buyers calling; however, those who are looking at businesses are dead serious. The buyers know what they are looking for, or at least the criteria for the business. They are able to evaluate the Confidential Business Review or Offering Memorandum and move towards a Letter of Intent (LOI) in a timely manner.

The selling market is still strong.

Seller's want to take advantage of the low capital gains treatment on the sale of their company before the new administration plans to raise them. They also know that there will be a glut of available businesses on the market and a downward price pressure in the next few years. They would rather sell before it becomes more difficult to compete with so many others.

There is a Private Equity Boom happening as well.

The interest level of private equity funds in middle-market companies is still very strong. More players and abundance of capital continue to fuel the growth. For smaller private companies, private equity funds can deliver much needed financial resources such as liquidity, growth or acquisition capital, and greater access to lender markets. They can also provide liquidity for companies that are turning the business over to their children or a change of ownership.

Ultimately, for those thinking about selling their business, there is no time like the present before there is too much competition in the marketplace.