Before buying any business, a buyer must ask lots of questions. You never want to buy a business at an inflated price or buy a business without understanding what makes it run. As the legendary investor Warren Buffett says, the gain on a business is made once you buy it (at the right price) and not when you sell it. Plus, one of the key factors he looks at is management, if he thinks it is capable of running the business successfully. Now, you might not have the money of Warren Buffett, and the future management of the business might be you, but the principles are the same.

The questions you must ask come down to these two fundamental points, and thus are useful to:

• Decide what price is right;

• Understand what skills are required to run the business and how exactly the business creates value.

  
  

How did you arrive at your asking price?

Often, sellers will base their asking price on arbitrary factors such as how much money they will need to move on with their life, or what they personally think the business is worth considering also emotional attachment as a value the seller should pay for. Find out what quantitative and objective information they have to back up their asking price and look at it carefully.

How will you document the financials of the business?

Make sure there is a clear paper trail for the company's financial data, otherwise it is not possible to make objective calculations necessary to arrive at an objective price.

How well documented are the procedures of the business?

Often small businesses operate with no set procedures in place. You will though need some sort of direction, such as manuals on company policies and practices.

How much does your business depend on a key customer or vendor?

If the company relies heavily on any one customer, you will be taking a huge risk. The client might even change supplier or follow the previous owner if they felt very loyal to him/her.

Do you have any past, pending or potential lawsuits?

The last thing you want is to inherit a lawsuit, so make sure that you are not buying a business that might involve you in any litigation.

What are your biggest challenges right now?

You want to be aware of potential minefields in order to get ready for them and include them in your financial calculations.

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