🟠 16 questions to ask when buying a business

The SMB Scoop is the newsletter to help you find, buy, operate, and invest in cash flowing small businesses.

I’ve been asked how best read and dissect a CIM (confidential information memorandums) like a pro. You get a CIM from a business broker or investment banker that provides key information about the company for sale.

While every CIM is different (short vs long, good vs bad), a business buyer should be asking themselves a number of critical questions, some of which are hopefully answered by reviewing the CIM and some that will be answered in live conversations with the broker and seller.

Answer as many of these questions, as quickly as possible, in order to save you time and ensure you are pursuing opportunities that are worth your time. Your goal is to attract deals that fit you and repel deals quickly that are bad for you. Your qualifying questions should be prioritized to identify the things you care about most or are deal killers for you.

Here’s my list of 16 questions to ask when buying a business:

1. What problem is the business solving?

I want to know why the business exists in the first place and if I expect for it to continue solving similar problems for customers in the future. Is this company solving a big problem for a few customers or a small problem for a lot of customers? We all have a purpose…but is it one you can get behind?

2. What’s real cash flow (EBITDA less maintenance capex)?

3. How durable is the cash flow?

Consistent cash flow month to month is preferred over super lumpy. Some business models have much more durable cash flow, like those that are contracted or not discretionary. High variability in the cash flow usually means a lower quality company and higher risk. Durability is also about your expectations for the cash flow to continue in the future.

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

Personal fit is so important. Buying a business is hard & is a long-term commitment. Different business models are better and worse depending on your personality.

5. Does it check all my deal criteria requirements?

Do not pass go if the criteria doesn’t match. If you are finding you are compelled to look at deals outside your criteria, update it but ensure it matches with where you want to go.

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

The answer a business broker provides is likely a sanitized version of why the seller is wanting to exit. Ask the seller directly, probe, go deep if something seems suspicious. Run if you feel like something is off. There are plenty of high quality, integrity first sellers out there, no need to waste your time on duds. Trust your gut.

7. How strong is the team excluding seller?

If you’re looking a buying a business in the $1-2M EBITDA range, I’d expect there to be a mostly full management team, probably not rock stars but the roles will be there and defined. If a business of this size doesn’t have this, it’s possible you are probably dealing with a seller who is working 2 or more roles, which you need to plan for.

8. Is the seller irreplaceable? 

Irreplaceable sellers are tough deals to do. With a seller who is very important to the business either sales or operationally, there is significant risk the business will be negatively impacted when someone like yourself walks in without experience or a relationship with the customers. The more a seller is necessary, the more seller note should be structured in (with forgivability tied to favorable results) and the more transition support will be needed.

9. Customer risk / concentration?

>10% of revenue or gross profit is a real risk. >20% of revenue or gross profit is a deal killer for most searchers. The loss of this single customer would result in extreme challenges and possible insolvency. These can be overcome by introducing a forgivable seller note tied to this customer remaining a customer over X number of years at a certain revenue level. A forgivable seller note also alleviates concerns surrounding information asymmetry between the buyer and seller. The seller will always know more than the buyer.

10. Supplier risk / concentration?

Supplier concentration is an under appreciated aspect that cause massive working capital crunches, especially if you currently have attractive terms or pricing with a supplier and you have an inventory heavy business. Ex: a critical supplier changes their pricing, terms, or no longer offers the products you need to buy, it can be disaster.

11. Industry tailwinds or headwinds?

Good, bad, neutral. Understand where the industry is going, trends, and possible consolidation (consolidation generally means more money, more buyers, and higher valuations). My favorite hack here is to find an investment bank who covers a particular industry, they usually post ‘primers’ or industry updates. Here is an example primer by investment bank Stifel called Restaurant Industry Quarterly Update Report on the restaurant industry.

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

Extremely important for direct to consumer companies like a residential landscaping company that gets almost of its business via Google my Business or SEO. Not as important for B2B business models.

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

Asking this question as soon as possible is a time saving measure for everyone involved. Ask “what is the seller’s valuation expectation?” If the broker refuses to answer, ask “can you provide a general range for which a company like this would trade for then?”, and they actually will answer this most of the time. You can also propose a specific price, and try to get live feedback: “I think this company is worth 4.5x EBITDA assuming all the financials come back clean, is that an actionable value to the seller?”

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

Always try to find contacts / owners currently operating similar companies or in the same industry. This can be done pre or post LOI, but is highly recommended especially if you are not from that industry. Huge amount of value in this.

15. What way can I connect personally with the owner?

Business is personal. And people like to sell to people they like and trust. Get a call with the seller as soon as possible, ideally before other buyers. Put in the first offer. First is always better in small business acquisition processes.

16. Anything weird about the business?

Conservatives banks don’t like weird attributes about a business. If the business has a financial story (“oh last year was down because of X”), it will likely will cause issues in securing financing Don’t sweep things like that under the rug. Identify them, bring them to light, and make sure they aren’t deal breakers.

1. Hiring offshore talent as sales representatives.

If you’re interested in hiring offshore team members (Philippines, Latin America) to your small business, submit your info to this form I have some great hires ready to be placed (virtual assistants, customer service reps, accounting, project managers, etc)

2. Perceptions of wealth

3. Newsletters can be big business. Matt gives us a guide. My newsletter generates $0 so I must be doing something wrong:

Looking to…?

• hire quality offshore talent from the Philippines or Latin/South American? Or need process documentation? Click here to tell me about your SMB offshoring needs.

• invest passively in SMBs? Join Accredited investors only…check out the SMB Junction Capital Connector investor network to get in the flow of off-market deals (self funded, independent sponsor, private equity)

• raise equity capital? Submit your deal under LOI for free to the SMB Junction Capital Connector to get intros to value-add accredited investors

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The SMB Scoop 

Ben Tiggelaar

Things I’m currently working on: www.bardocapital.com, www.smbjunction.com, [acquisition made in June 2023 to be announced…]