Think You’ve Found a Business to Buy? (Part 2)

Here’s Your Guide to Ask All the Right Questions
About Yourself, the Seller and the Business
(Second in a series of at least two articles)

Buying your own business, especially if it’s your first time as an entrepreneur, is a daunting undertaking … but not impossible given the right planning and execution. There are a lot of moving parts to consider including a careful analysis of physical assets, financial statements, strengths of management, employee engagement … and relationships with customers, the community and competitors.

In our last issue you were presented the two broad categories of business buyers … financial and strategic.

Additionally, we outlined the Good News and the Less Than Good News when it comes to buying a business.

Finally, you reviewed an eleven point outline of self-examination questions to consider as a preface before going further in your consideration to purchase a particular business. Additionally, your emotional, financial and family constraints were addressed.

As promised, in this issue we’ll continue with a deep-dive into the critical questions to ask the seller. That exercise is based on:

6 Categories of Questions You Must Ask the Seller

Your next challenge is the hard work of due diligence. Whether you have past success in buying a closely held business or are relying on the proven professional capabilities of a seasoned business broker/advisor, it is an absolute must to get solid answers to questions regarding the six major drivers of business value.

• Company Organization
• Books and Records
• Systems
• Policies and Procedures
• Personnel and Clientele
• Marketing and Sales

 

Let’s take a look at each of these six major drivers of business value and the types of questions you, the buyer, must ask. You are seeking evidence that the business operates with smoothness, accuracy, clarity, efficiency, quality and positive results.

Incomplete or negative responses puts a check mark in the “Caution” or “Do Not Proceed” column of your evaluation checklist.

Company Organization: Guiding Principle … The more valuable the current owner(s) are to the company, the less valuable the company is to you, the prospective new proprietor. Your overriding concern is, “Would the business survive for 90 days without the current owners at the helm?”

The answer will tell you to what extent the business is dependent on the existing ownership as opposed to a “going jenny” with structure in place to operate without dependency on one or more key players. A general rule of thumb is that no more than 10% of business revenue should be dependent on any one person. Likewise, success in operations should not be based on one individual’s talents.

Your Questions:

• What is the leadership structure of the company?
• How would you describe the culture and personality of your staff?
• Are there clear lines of communication among workers to each other and management?

 

Books and Records: Sloppy or non-existent books and records are a red-flag that often is raised when you examine a closely held company. You will want to see the promise (strong likelihood) of sustainable earnings and growth following the purchase.

Your Questions:

• Are your financial records complete, accurate and up-to-date?
• Are personnel records fully documented and compliant with federal, state and local employment requirements?
• Are licensing, continuing education or other legal issues compliant with industry, professional and legal constraints?

 

Systems – Repeatable, Efficient Processes in Place:  The lack of state-of-the-art systems indicates that the management tools necessary to run the business efficiently and profitably have not been implemented.

Your Questions … Do They:

• Improve top-line performance?
• Meet customer expectations?
• Develop consistent results?
• Engage employees with guidance, direction and expected results?
• Reduce costs and improve profits?

 

Policies and Procedures: The presence of up-to-date, compliant policies and procedures offers confidence to you that appropriate personnel, supervisory and safety issues are proactively addressed.

Your Questions … Are The Following Written, Up-to-Date and Available to Staff

• Human Resources?
• Operations?
• Marketing?
• Sales?
• Communications?

 

Personnel and Clientele: You must be concerned about “flight risks” of key employees. A solid record of how employees are on-boarded, groomed for advancement and managed to motivate employee engagement will offer comfort that there is likely to be continuity in staffing.

Your Questions … Is There Written Documentation to Support

• Staffing procedures – acquisition through termination?
• Personnel development, training, career path development?
• Management nurturing, motivating and enhancing employee engagement?
• Supervision and evaluation by management to recognize strengths and improve performance?

 

Marketing and Sales: Marketing support is essential to drive superior sales performance. A red flag is raised if sales people are expected to perform as marketers as well as sales/relationship managers.

Your Questions … Does Marketing Support Sales Goals With:

• Stated marketing strategy?
• Written marketing plans for current and ensuing 2 years?
• Specific target outcomes for marketing campaigns?
• Evaluation of marketing efforts vs. sales results?

One Final Thought

Once you are comfortable with answers to the above questions, there is another critical consideration … “What changes could you make to enhance revenue, streamline operations and improve the company’s bottom-line?” Even in the face of some negative responses to the foregoing, your evaluation of how you may further enhance the business asset by creative “tweaking” may be a major factor in your decision-making.

Takeaways

We’ve covered a lot of ground and you may be left with the feeling that all of this is somewhat overwhelming. Not to worry … that’s a typical reaction which mellows out when you know that there is help available.

That’s where we come in … to help you evaluate business purchase opportunities that specifically fit your unique profile of emotional, financial and family constraints. Together, we will work with you and deliver action-oriented business advice to maximize the value of your planned purchase … or counsel on what may be a more appropriate alternative.

We will help! Just give us a call or drop an email. We’ll respond promptly!

Stay tuned for our next issue and profit from a comprehensive roadmap of how to obtain an accurate business valuation and financing resources.

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