Due Diligence Questions to Ask When Buying a Business

In this article, the goal is to help buyers ask the right questions as such would help with making informed decisions.

When buying a business, you need a general idea of your investment.

The right questions will require focusing on multiple areas like employee information, customer information, physical assets & properties, and legal issues.

Other areas to focus on as a buyer include intellectual property, contracts, financial information, and business structure & operations. Detailed knowledge about these areas enables you to bargain better.

So, what exact questions do you need to ask when performing due diligence?

What Questions To Ask Before Buying a Business

People sell and buy franchises or businesses for a variety of reasons. One of the primary objectives is to make a profit. From the buyer’s point of view, a potentially profitable business would be a great bargain.

However, that isn’t automatic, as much work is needed to determine the business’s health.

As a buyer, the only way to know about the health of a business enterprise is by conducting thorough due diligence. This requires asking the right questions.

Due Diligence Questions to Ask When Investing in a Business

Due diligence questions are necessary as they help reveal a lot about a business. This enables you to assess if it’s worth buying or not.

The need for such questions is simple; business sellers won’t be entirely honest with you about the business. Through the right questions, you’re able to unravel the industry.

Is the business financially viable? How has the company been valued? What is the reason(s) for selling the business? Have complete financial records been maintained?

Are financial records accurate? Are there any legal issues? Do you have to retain existing employees? Who are your customers?

More insightful questions to ask when buying a business include knowing about the trial period. Do you have an existing client base? What’s the opinion of stakeholders about the company?

Do employees know about the Sale? Is the service of a business broker necessary? Is a commercial lease involved?

What more? Does the business require permits or licenses? What’s the handover period? These questions are critical to a successful purchase of a business.

Let’s look further at some of these questions and what they entail.

i. Is the Business Financially Viable?

All interested buyers always seek viable opportunities to invest.

As a potential buyer, you need to pay close attention to how the seller answer’s this question. Any deviation from a straight and precise answer is a red flag.

The seller should be able to communicate this information.

ii. How has the Business been Valued?

The business needs to be a comprehensive valuation to reach an asking price.

It’s important to ask how the asking price was reached. This knowledge gives you a better bargaining position as you can avoid being disadvantaged.

iii. What is the Reason(s) for Selling the Business?

Business owners sell their businesses for various reasons, including being financially handicapped, the need to retire, or when they get ill.

With this knowledge, you can better strategize toward reaching a better negotiation.

iv. Have Full Financial Records been maintained?

For a buyer to have a clear understanding of claims of past earnings, it’s essential to ask for detailed records relevant documents.

These will include purchase invoices, previous tax returns, and purchase orders. Also, check to ensure the correct taxation amounts have been paid.

v. Are Financial Records Accurate?

It’s essential to not only rely on or take the information provided by sellers at face value. Due diligence will require ensuring the notification is accurate.

You’ll need to cross-check to see if the numbers match up. That will include all aspects of finances, including website traffic.

vi. Are there any Legal Issues?

Nobody wants to buy a troubled business, especially with legal problems.

Asking this problem sets the stage for proper business assessment by your legal representatives and accountants, who must be present.

vii. Do you have to Retain Existing Employees?

It’s essential to figure out your responsibilities or obligations as a buyer.

Here, the scope of purchase determines what happens. When buying its assets alone, you won’t have to take on the business’ employee entitlements.

You’ll need to figure out what responsibilities apply to you carefully.

viii. Who are your Customers?

The marketing documentation pack gives you an idea of the customer base.

This is backed by further clarifications provided by the business seller. Armed with this information, you get to assess if the customer base meets your target or not.  

ix. Knowing about the Trial Period

A business’s most recent financial records test is best performed during a trial period.

There should be a minimum trial period within which minimum sales shouldn’t be less than what’s contained in the financial records. Any deviation from that would be unacceptable.

x. Do you have an Existing Client Base?

Does the seller offer an existing client base as part of the deal? To determine how much work you need to put in to draw in new clients, it’s essential to ask this question.

Buying a business with an existing client base gives you an edge as you can build a thriving operation much faster.

xi. What’s the Opinion of Stakeholders about the Business?

Business stakeholders are varied and include customers, staff, and suppliers.

These are key players you’ll need to seek information from. You can find varying perspectives about the company by asking them questions about the business.  

xii. Do Employees know about the Sale?

Consider finding out if employees are aware of the sale situation. This is important because it helps establish operational stability. People should be knowledgeable about the takeover of the business.

xiii. Is the Service of a Business Broker Necessary?

Business brokers offer highly beneficial services, including valuation expertise, confidentiality, better negotiation, marketing, and resources.

Knowing what these benefits enable you to determine whether business brokers will be necessary to your takeover bid or not.  

These due diligence questions when buying a business are crucial to a successful takeover. The right questions give you an idea of the business’s health you intend to purchase.