Ask These Questions When You Buy a Business

So you are looking to buy a business or expand your current company through an acquisition. It is a decision that demands a thoughtful approach. Here are some questions that will help you begin to plan your acquisition process.

• What’s their EBITDA? What is the operating income of the company you’re looking to buy? For review, operating income is profit from eh business core operations of the business. It’s net revenue after you deduct the operating expenses like wages, costs of goods sold, and expenses associated with running the business. It’s probably the best metric to look at it if determining the long-term profitability of a business because it shows you how much money they make from their core business operations. Net income can be manipulated with tax and accounting methods. Operating income removes those tactics and helps you see how well they run their business.
• What is the likelihood revenue will remain stable in the current economy? You will want to have an understanding of the risk you will be exposed to if you purchase this company. Revenue might be high now, but will that last? What factors and forces in the marketplace can affect the income after you own it? Conducting a robust SWOT analysis can help you discuss risks you’ll face once you own the new company.
• What competitors might enter the marketplace in the future? Porter’s Five Forces dictate the risk you’ll face. Who can enter your market? Is it easy or hard for a new competitor to show up? That can be risky for you.
• What are their sources of revenue? Are a few select clients responsible for the lion’s share of their revenues? If those clients leave, can the business survive? Be sure you carefully examine their client mix. In healthcare, we call it payer mix. How much of their business is private insurance and government? Is it possible for you to move the needle?
• Will the staff and the customers stay with me? How many vital employees will stick around if the owners sell to you? Just as important, how many customers will stay? Are you going to ask the sellers to stay out of the market for a defined period? Will they sign a non-compete agreement? What about the existing employees? These are crucial questions you will want answers to before you sign on the bottom line.
• Do their contracts need to be renegotiated? How strong are their current contracts? Do they need to be strengthened? Can you improve them? You not only buy the assets of the company, but you also purchase the contracts they hold. Make sure you understand their existing agreements clearly.
• Will the seller finance the sale of the company? Will the seller lend you the money to buy their company? This can help you as you raise capital to purchase the company. It will come at a cost but might be well worth it, and it never hurts to ask.
• Will the acquisition be treated as a stock or asset purchase? This transaction will have tax implications for the seller and yourself. Get your CPA and attorney involved early int he process to you can craft a purchase plan that helps both parties from a tax standpoint.

There are just a few questions you should begin thinking about as you look to acquire any business. Another critical step to take is to get the help you need. Contact me today and let’s work to get that new business for you.