Whether you are a seasoned entrepreneur ready to expand your company or a prospective small business owner looking to buy a company instead of starting from scratch, you want to be prepared before investing a significant sum in a dream built by someone else.
After all, you are about to invest a large sum of money in a company you did not start yourself in an industry you may not yet be an expert in!
Despite these unknowns, buying a business should never feel like walking into a casino and hoping for good luck. If you know what to ask when buying a business in Texas, you can transact with confidence and set yourself up for success.
The Hunnicutt Law Group team can help you navigate what questions to ask when buying a business and help you determine if a business acquisition is right for you. We will help you understand that asking the right questions is not just about finding a good deal but also about avoiding a bad one.
1. Why Are They Selling This Business?
When determining what questions to ask when buying a business the first question should always be: Why are you selling this company? The answer may confirm your decision to proceed with the purchase. However, it may make you reconsider your desire to move forward with the transaction.
Some red flags for buyers include:
- Issues with the company’s finances;
- Inability to source a major component of the company’s product;
- Loss of a significant contract; and
- Destabilizing changes in management.
However, these may not be automatic disqualifiers. It is always worth asking more questions. Some things to ask when buying a business with some potentially disqualifying issues include:
- Are the financial concerns due to the owner’s health or personal matters?
- Is the inability to source a major product or component a short-term supply chain issue or a potential long-term problem?
- Is the loss of a significant contract due to an issue at the company or a change in government funding or a client going out of business?
- Are the changes in management a problem with the company or the result of retirement?
Acceptable answers to any of these questions may make the purchase of this business, especially at a discounted price, make sense for both buyer and seller. A trusted attorney can help you navigate some of these questions throughout the due diligence process.
2. Is This Business Financially Healthy?
Business valuation helps you determine the health of a company. However, one of the key things to ask when buying a small business in Texas, is how it is doing financially.
What to ask when buying a business includes requesting information about cash flow and financial liabilities like outstanding debt, accounts payable, and sales and interest payable. Key financial items to request include:
- At least the last two years’ worth of financial statements but preferably five, if available;
- The current year’s financial statements;
- The last income tax return;
- Business activity statements from the last four quarters; and
- A listing of every asset that the sale would include.
Part of the due diligence process includes ensuring that the financial information you receive is accurate. For example, if you buy a manufacturing business, it may be somewhat easy to ensure that materials in equals widgets out. Other businesses might not be so clear.
3. How Good Is the Existing Management Team?
When you buy a business, you may inherit a management team. The management team may be people who will help you grow the business. When considering buying a business in Texas, you want to know whether these are capable leaders and whether they are a good match for your leadership style. If so, then this may be a great resource and a way to implement your vision.
4. Does The Business Have Any Past, Pending, or Potential Lawsuits?
You do not want to buy any lawsuits, period. Be sure to ask if there are any pending, past, or potential legal proceedings.
Have an attorney help you get the response in writing as part of any purchase contract. The attorneys at Hunnicutt Law Group are experienced business litigators and can help you with this aspect of purchasing a business.
5. How Much Does the Business Rely on Any Single Customer or Supplier?
The company you are buying might look successful on the outside, but if it relies entirely on one vendor, customer, or supplier, this may be too much risk for an entrepreneur or first-time business owner to bear. This is especially true if the customer or supplier has a long-term relationship with the previous owner.
What to ask when buying a business includes whether the business relies heavily on any one single party for a significant part of its business and whether the contracts with that party are transferable.
6. How Well-Documented Are the Company’s Existing Procedures?
Often, a company has been run based on “the way we have always done things.” These practices may be ingrained in the way the company runs now and might work for the current owner, but they may not transfer when you are handed the keys.
You will want to ask about and confirm that there is a clear set of directions on running the business, such as manuals on company policies, practices, and procedures.
7. What Skills Do You Need to Run This New Business?
Even if you know the company’s industry well, be sure to ask about the types of skills you need to become the owner of this business. For instance, you may be an accomplished chef, but if you buy a restaurant, are you prepared to manage everything from balancing the budget to handling payroll—or to hire and trust someone else to do so?
8. What Is Your “Edge” in Acquiring This Company?
As an entrepreneur, you are buying a business to make money. What to ask yourself when buying a business is, What is your edge? What can you add to this company to make it grow? If you do not have an answer or a plan, you may not be ready to take that next step.
How Hunnicutt Law Group Can Help
Our experienced business law team at Hunnicutt Law Group has years of experience helping Texas entrepreneurs as they buy and sell small businesses. We have strategies to help you throughout all stages of the growth cycle of your company. Contact us today to discuss your business needs. We are available through video conferencing, online, or by phone at 214-361-6740.