Knowing what questions to ask an owner is one of the most important aspects of evaluating a business for purchase. First, you've done your initial due diligence and contacted various businesses to create your "short list" of top candidates. Next, you need to dig deeper and talk directly with the team or person responsible for running the company for the past few decades.

You will be able to get firsthand information about the actual state of affairs for the business you are interested in purchasing. Be specific in your questions and get a full picture of the business's operations, revenue generation, and financial results.

Seven questions for the owner to ask when considering a business sale:

1. This is the most important question to ask your current business owner. The way they answer will determine the course of the purchase process. This can make or break the deal.

Most people will answer that they want to cash out their equity or retire soon. But, while the owner might be truly retiring, you should also look out for red flags such as a shrinking customer base or new regulations that could affect the profitability and viability of a business.

While you might believe the reason behind the seller's decision to sell, it is important to assume that there could be other reasons. These reasons might not be important, but you should double-check all information you receive from the seller.

2. What are you being compensated for?

Another important question you should ask when purchasing a business is how much the owner is being paid. Although there may be multiple answers, this is an important question. Is it worth buying if the business does not have enough cash flow to provide for its owners and their families?

Compensation may not be straightforward. However, owners can get cash, W-2 earnings, and access to company resources as compensation.

It is important to understand exactly how the owner has profited from the business. This will allow you to get a good idea of the financials and help you decide if you want to make an offer.

3. Are You able to generate immediate cash flow?

You are purchasing earnings when you buy a company. This is why you didn't start your own business. You know that you don't want to invest money in a venture and then wait five years for the cash flow.

If revenues are falling for any reason, you will want to find out why. If your revenues are at $0 at the close of the sale, then you have effectively purchased a "lemon" business. Look at cash flow patterns to find out the owner's thoughts about them.

Sometimes, there are very good reasons to see a decline in revenue. However, you can get an explanation and verify the accuracy of the claims before you make any changes if you are considering purchasing the business.

4. What are your biggest business challenges?

This will give you valuable information about a business owner. Perhaps you should ask the seller what frustrates him most. This will reveal the weaknesses and greatest opportunities of your business.

You may be excited or moved in a different direction by the answer. To keep this opportunity alive, you should look for answers that support the story you are telling. For example, the owner might have reached the end of their ability to grow the business. You might have a weakness that they find to be one of your greatest strengths.

You should be aware of any outside factors, such as zoning changes and general industry decline.

5. What are your most valuable business resources?

Asking the owner whether the business is being sold includes existing resources such as skilled workers can help you determine if it will succeed. However, this could pose a problem if the owner mentions a vendor or key employee that you won't inherit.

Even smaller businesses, women, minorities, and disabled veterans are eligible for special certifications. However, it could be difficult for you to replicate the success of the previous owner's business if you don't have the same designations or resources.

6. What is the nature of your customer base?

It is important to determine whether customers are individuals or large companies and if any government work has been done. Are there a handful of large, well-established customers, or are there thousands of customers who change? All customer characteristics have their advantages and disadvantages. However, it is a good idea to be prepared for what you can expect when purchasing a business.

Are these customers recurring, or are they one-off transactions? How much does it cost to acquire customers, and how long would they last? These are just some of the questions you should ask to get a full picture of your business's customer base.

7. Which are your major competitors?

When evaluating a business to sell, it is important to understand the market, threats, and competition. Ask the owner about their main competitors and which areas they excel in. You might be the leader in your industry.

Ask the business if it has any competitive advantages and whether these competitors are indirect or direct (i.e., Are they offering a similar service, but not in direct competition with them? ).

You will better understand the business's potential and the deal's value if you spend time with the owner. In addition, you can get the BizBuySell Guide to Buying Small Business for more information.