“If I had an hour to solve a problem and my life depended on the solution, I would spend the first 55 minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than five minutes.” – Albert Einstein
Ask Seller Prepared Questions
When purchasing a business, a qualified buyer often asks to meet the seller in order to ask any questions that they may have about the business. This step in the business sales process occurs after the buyer has received the confidential listing package containing the financials, history, and operational information of the business. The goal of the buyer-seller meeting is to provide sufficient information so that the buyer may make an offer on the business. In order to get the best answers as possible from the seller while addressing all areas of concern, buyers should ask prepared and well thought out questions. A prepared and knowledgeable buyer helps establish the buyer’s credibility with the seller which is critically important in business sales, especially if the buyer asks the seller to provide some seller-financing. Crucial questions to ask a seller include topics covering the financials of the business, why the owner is selling, the customer concentration, and legal liabilities.
Buyer Should Prepare for Meeting with Seller
Any experienced business broker knows that a buyer who comes to a buyer-seller meeting with a notepad and a prepared list of well thought out questions is a serious buyer. In contrast, a buyer who shows up at a buyer-seller meeting with no note taking material and no questions prepared is far less likely to make a serious offer on the business. A serious buyer is also more likely to ask the right follow up questions by having an organized and structured set of questions and topics to cover at the meeting. Buyers commonly forget to ask important questions or address certain areas of concern unless they first prepare their questions ahead of time. By researching and studying the business operations, financials, and local industry dynamics prior to the meeting, buyers may formulate the most pertinent and incisive questions for the seller.
Prepare Questions About Business Operations
Discussions topics concerning business operations include the role and responsibilities of employees, the role of the owner, supplier relationships, advertising efforts, business background information, and the competitive advantages of the business (or how it provides goods or services to its customers for a lower cost or higher quality than its competitors). The confidential listing package that buyers receive from the broker should contain much of this information which should be read and understood prior to meeting the seller. Additionally, buyers may peruse the seller’s website in order to gain more insights into the operations of the business. The less knowledge and experience a buyer has in the industry in which the business operates, the more they must study the operations of the business in order to formulate the right questions to ask the seller.
Prepare Questions About Financials
The financials of the business – or tax returns and profit and loss reports that reveal the gross sales, business expenses, and adjusted owner benefit of the business over a historical time period – are always given to qualified buyers prior to meeting the seller. Without clear and coherent financials, it is often impossible for a buyer to make an educated offer on a business. Before asking questions to the seller about their financials, buyers should usually first consult with the broker for clarification. Many sellers are unaware of the details concerning their own financials, and may not be able to fully or accurately answer the buyer’s questions. Buyers are usually better off when they put questions about the financials in writing with specific references to the data from the financials that have been previously given to them.
Prepare Questions About Local Industry Dynamics
The competitive landscape of a business along with how the local economy (including seasonality) affects certain industries are often key discussion topics at buyer-seller meetings. In order to ask the right questions, buyers must do their own research and preliminary due diligence prior to the meeting. Buyers may use a wide variety of techniques to educate themselves about local industry dynamics including online research of local competitors, visiting local competitors to gain insights into the industry, speaking to customers in the industry, and researching general industry statistics and trends. As with studying the operations and financials of the business, the more thought and time a buyer puts into their questions about local industry dynamics, then the more transparent and helpful answers they are likely to receive from the seller.
Example of Asking the Right Questions When Buying A Business
- Let us assume that Barry the Buyer is seeking to purchase a large property management business in South Florida.
- Barry has been fully qualified by the business broker and has received a comprehensive listing package about the business containing the financials along with a thorough description of its background and current business operations.
- All parties have convened at the seller’s office for a meeting at Barry’s request so he may meet the seller and discuss the business.
- Bad question: “How many employees do you have?”
- Good question: I see you have 20 employees who service your customers’ properties along with two quality control managers. Do you think any of the 20 non-managerial employees have what it takes to be promoted in the future for managerial positions?
- Here, Barry’s bad question shows that he has not read the listing package (which breaks down the employee roster), while his better question will elicit useful information about whether the infrastructure can support future growth by promoting managers from within.
- Bad question: “What is your salary as the owner?”
- Good question: “I see on your financials that you pay yourself a $150K/year salary as an absentee owner, which is included in the owner benefit. If I replace you and work full time in the business, can I replace one of the managers?”
- Clearly, Barry’s bad question demonstrates that he did not bother to look at the financials, which clearly notes the owner’s salary.
- Meanwhile, Barry’s good question induces a much more informative answer that will allow him to more accurately evaluate his potential Return on Investment.
- Bad question: “Who are your competitors?”
- Good question: “Which of your dozen or so competitors do you fear the most and why?”
- Barry’s bad question tells the seller that he has not done his homework of researching the property management company’s competitive environment.
- On the other hand, Barry’s good question will allow him to pinpoint the attributes of the best competitor (according to the seller) and compare those attributes with the business in question.
A prepared buyer with well thought out questions during a buyer-seller meeting will establish credibility with the seller as being serious and competent to take the business over. Better questions will yield better answers, and will eventually allow a buyer to make a better informed decision about whether to purchase the business.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.