5 Questions You Must Ask Before You Buy a Business

If you’re contemplating a Denver business acquisition, you may be reluctant to trust the seller and concerned about the inherent risks. Or perhaps you’re excited about the investment, and how you might use it to change the world—or at least your own life. Many people planning to buy a business vacillate between these two extremes. Business buyers need expert guidance to prevent their emotions from overriding their well-reasoned decision-making. Even with the right advisory team at the helm, a little critical thinking goes a long way, and can protect you from bad investments. Here are five questions oyu must ask before purchasing a Denver business.

Why is the owner selling?

Beware of companies sold in a rush, for no clear reason. There may be financial, legal, or other issues the owner is concealing. Instead, look for businesses where the owner has a clear motive to sell that doesn’t undermine confidence in the company itself: a retiring owner, plans to move onto something else, a death in the family, or other life transitions. Beware of companies in serious distress, no matter how much the owner insists you can turn them around.

 

How much risk does this company entail?

You should only consider investing in a company that either poses minimal risk or a company for which you have the specific skills necessary to turn it around. The latter is very rare; don’t let false hopes color your vision. In most cases, the safest bet is a company with low risk. That means a company with recurring income, demonstrated financial health, and an expert management team at the helm.

Is there a sound transition plan?

Cultural and transition failures are leading reasons for acquisition failures. You need to begin working on your transition plan from day one. This includes a communication plan, a strategy for keeping key staff on board, and specific policies for managing any cultural changes you anticipate.

Do I have the skills necessary to run this company?

It’s not enough to purchase a successful company. You must also buy a company that you have the necessary skills to successfully run. Your experience in the tech sector, for example, may not translate well to a role in healthcare. You must understand the unique niche in which you are purchasing. And to help the company grow beyond its current state, you must be at least as knowledgeable in the industry niche—or willing to become so—as the current owner. Consider how your connections, experience, and education align with the company you intend to purchase.

Have I performed comprehensive due diligence?

Trust, but verify. It’s the cardinal rule of any business transaction. No matter how profitable the business seems, you must verify every claim the owner makes. This requires an exhaustive due diligence process, along with a team to help you assess what information you need and how to interpret the information you get. Don’t skip due diligence, and never allow the owner to pressure you into speeding the process up.