15 Key Questions to Ask when Buying a Business cover image
13 Feb 2024

15 Key Questions to Ask when Buying a Business


1. What problem is the business solving?

  • This question is all about getting to the heart of what the business does and why it matters. 
  • You're looking to understand the core problem the business solves.
  •  Is it easing a major pain point for a select group of high-value customers or providing a simpler solution to a widespread, minor inconvenience? 
  • This insight is crucial because it tells you about the business's relevance and potential longevity. 
  • A business that effectively addresses a major, ongoing need for its customers is likely to stay relevant and continue solving similar problems in the future. 
  • It's also about whether this mission resonates with you. 
  • Would you feel passionate and committed to continuing this purpose? 
  • For example, a business that provides eco-friendly packaging solutions is addressing a significant environmental issue, which might align well with your values and expectations for long-term impact.


2. How durable is the cash flow?

  • How reliable is the business's income? If you are going to rely on it, its a lot less stressful to know what income should be coming in each month.
  • Consistent, predictable cash flow is usually a sign of a stable business model. 
  • Look for patterns in revenue – does the business earn steadily, or are there big ups and downs? 
  • Some businesses, like those with long-term contracts or non-discretionary products/services, generally have more stable cash flows. 
  • High variability can signal higher risk and a harder to manage business.
  • For instance, a business that relies heavily on seasonal products might see significant fluctuations in cash flow, making financial planning more challenging. 
  • Durability also ties into your expectations for the future – is the business's current performance sustainable in the long run?


3. Would I enjoy and be proud of owning it for ten years?

  • When contemplating owning a business, it's not just about the numbers; it's about personal satisfaction and pride. 
  • You're asking, "Can I see myself happily running this business for the next decade?" 
  • This involves considering if the business aligns with your interests, values, and lifestyle. 
  • For example, if you're passionate about sustainability, owning a business that specializes in eco-friendly products might be fulfilling. 
  • Similarly, if you prefer a hands-on approach, a service-oriented business might suit you better than a passive investment. 
  • The key is finding a business that not only meets your financial goals but also feels rewarding and engaging to manage over the long haul.


4. Does it check all my deal criteria requirements?

  • This may sound obvious but its easy to overlook when you see a sexy business or are trying to compare lots of saved listings.
  • Your criteria might include factors like business size, industry, location, financial performance, and growth potential. 
  • Sticking to these criteria is crucial for staying focused on what you want to achieve. If you find yourself constantly drawn to businesses outside your set criteria, it might be time to re-evaluate your goals and adjust your criteria accordingly. 
  • However, maintaining discipline in your search ensures that you invest in a business that truly aligns with your long-term vision and objectives.

5. Does the owner’s selling ‘story’ make sense?

  • Understanding why the current owner is selling is vital. 
  • It provides insights into potential issues or opportunities within the business. While a broker might provide a polished version of the seller's story, speaking directly to the seller can reveal deeper insights. 
  • If the seller's reasons seem vague or inconsistent, it's a red flag. 
  • For instance, if a seller is retiring or moving to another industry, it's usually a straightforward and understandable reason. 
  • But if they're vague about operational challenges or market conditions, you'll need to dig deeper. 
  • Trusting your intuition here is important; if something feels off, it's better to walk away.

6. How strong is the team excluding the seller?

  • This question assesses how dependent the business is on its current owner. 
  • For businesses under $200k in profit, the owner may often still be heavily involved whereas over $1m in EBITDA a competent management team should already be in place. 
  • If not, it might indicate that the seller is integral to every operation, which could be a problem once they leave. 
  • For instance, if the seller is the main person driving sales or managing key relationships, their departure could significantly disrupt the business. 
  • Understanding the team's strengths and weaknesses helps you plan for any gaps you might need to fill post-acquisition.


7. Is the seller irreplaceable? 

  • The goal here is to evaluate how critical the seller is to the business’s success. 
  • If the seller plays a key role, especially in sales or operations, their exit could pose a risk to the business’s stability. 
  • This risk is particularly high if you lack experience in the industry or have no established relationships with the customers. 
  • To mitigate this, consider structuring a seller note in the deal, where part of the payment is contingent on the business's performance post-acquisition. 
  • Also, plan for a comprehensive transition period where the seller can help transfer relationships and knowledge. 
  • The less replaceable the seller, the more support you'll need during this changeover.


8. Customer risk / concentration?

  • This question addresses the risk associated with customer dependence. 
  • If a significant portion of revenue or profit comes from a small number of customers (or even just one), it introduces a high level of risk. 
  • For example, if more than 10% of revenue comes from a single customer, losing them could seriously harm the business. 
  • Over 20% is even riskier and often a deal-breaker for buyers. 

9. Supplier risk / concentration?

  • Supplier concentration examines the reliance on specific suppliers. 
  • This can be a significant issue, especially in inventory-heavy businesses. 
  • For instance, if you depend on a sole supplier for critical components and they change their pricing or stop supplying, it could be catastrophic. 
  • To mitigate this, evaluate the terms and relationships with key suppliers. Diversifying suppliers or negotiating favourable terms can reduce this risk.

10. Industry tailwinds or headwinds?

  • Understanding the broader industry trends is crucial. 
  • Is the industry growing, stable, or in decline? 
  • Industry tailwinds (positive trends) can mean growth opportunities and higher valuations, while headwinds (negative trends) may signal challenges ahead. 
  • One effective strategy is to consult industry reports such as Ibis World that provide detailed insights into current trends, challenges, and opportunities within the industry. 
  • This information can guide your decision on whether the business is likely to thrive in the future.

11. What do google reviews / third parties say about the company?

  • The reputation of the business, particularly for consumer-facing companies, is critical. 
  • Google reviews and feedback from other third-party sources can give you an honest view of how customers perceive the business. 
  • For a B2B (business-to-business) model, this might be less critical, but for a B2C (business-to-consumer) company, such as a landscaping service that relies heavily on Google My Business or SEO for new customers, it's vital. 
  • These reviews can reveal potential issues with customer satisfaction or areas where the business excels, influencing your valuation and potential strategies post-acquisition.

12. Does my valuation & structure meet the seller’s expectations?

  • This is about ensuring your valuation aligns with what the seller expects. 
  • It’s important to ask early on about the seller’s valuation expectation to save time for everyone involved. 
  • For instance, if a broker doesn’t provide a direct answer, you could ask for a general price range for similar businesses. 
  • Sometimes, proposing a specific price based on your valuation, like "I think this business is worth 4.5x EBITDA," and gauging the seller's reaction can give you valuable insights. 
  • This approach helps avoid lengthy negotiations that are unlikely to result in a deal if your valuation and the seller’s expectations are too far apart.

13. Who do I know that owns, operates, or invests in a similar company?

  • Reaching out to individuals who have experience in the same industry or similar businesses can be invaluable. 
  • Whether you’re already connected or seeking new contacts, insights from these individuals can be extremely helpful, especially if you're new to the industry. 
  • They can provide practical advice, potential pitfalls, and unique perspectives that only someone with direct experience can offer. 
  • This networking can happen both before and after you put in a Letter of Intent (LOI), but it’s highly recommended to get these insights as early as possible.

14. How can I build trust with the owner?

  • The personal aspect of business transactions is crucial. 
  • Establishing a rapport and trust with the seller can significantly influence the process. 
  • Aim to have a direct conversation with the seller early on, ideally before other potential buyers come into the picture. 
  • Showing genuine interest and being the first to make an offer can be advantageous in small business acquisitions. 
  • People often prefer to sell to someone they like and trust, and building that personal connection can make a big difference.


15. What’s the real cash flow the owner is getting (EBITDA less maintenance capex)?

  • This is about understanding the true profitability of the business. 
  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) gives you an idea of the business's operational performance. 
  • But it's crucial to subtract the maintenance capital expenditures (capex) – the money needed to maintain the current level of operations. 
  • This will give you a clearer picture of the actual cash available to the business owner. 
  • For instance, a business might show a healthy EBITDA, but if it requires significant ongoing investment in equipment or technology to keep running, the actual cash flow might be much lower. 


Now that you know exactly what questions to ask.

You can start your search for your perfect business here.