Should I Buy a Failing Business

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Should I Buy a Failing Business

For most business buyers, securing the perfect acquisition usually means targeting the sweet spot that occurs after a business has proved itself viable but before it’s hit the top of its growth curve – in short, an investment that can stand on its own feet while still having plenty of room for development. For others, a failing business offers more of a challenge – and commensurately greater rewards – as it represents a chance to buy at a rock-bottom price with potentially sky-high returns.

It’s not for the faint-hearted, though. Buying a business that’s on its uppers is a big gamble, especially if you’re tempted to stray outside your own area of expertise. To optimise your prospects, confine your search to those businesses that complement your existing strengths and forensically examine all how you could add value before you part with your hard-earned cash.

Do Your Research

As long as you understand why a business has failed, you’ll soon be able to work out whether it’s salvageable. If profits have been good in the past and the current problems can be put down to issues with cash flow or bad management, for instance, fixing what’s wrong could result in a quick win. Get a clear picture of any outstanding liabilities or unresolved legal issues before you decide to take the plunge.

Go the Extra Mile

The vendor may be coy about the real reasons behind the business’s decline – or, if it’s in the hands of the liquidators, may not have the full picture. Be prepared to call clients, suppliers and customers to find out more about the story behind the sale. Only by conducting a thorough investigation will you be able to approximate the cost of getting the business back on its feet. Don’t wait for nasty surprises to ambush you further down the road.

Act Swiftly

Businesses that are haemorrhaging money can’t afford to wait for the results of protracted deliberations, so be prepared to act decisively, especially when cutting back on overheads – including the inevitable redundancies. If getting rid of half your staff means you can continue to offer more secure employment prospects to the other half, you’ll be acting with integrity. Do be fair about your reasons, though, and try to get the remaining staff on-side by dealing as honestly and openly as you can with them.

Secure Your Funding

It’s important to be confident that you’ll have access to the funding and resources you need to turn your failing business around, should you decide to buy it. If you don’t have your financial ducks in a row, you could end up losing everything you’ve invested before you’ve managed to turn a profit. The business may have failed in the first instance purely because the owners ran out of money and found it hard to raise cash in tough economic times. Unless you have a 24-carat business plan, be aware that lenders may well be jittery about the prospect of throwing good money after bad by investing in a business that’s already failed once.

Make Plans

Have a rescue strategy outlined before you move on to the purchase. Think about the best way to value the business – possibly by discounting the sales multiplier that’s most commonly applied in its business niche or by estimating its liquidation value. Alternatively, you could look at the balance sheet (book value), before applying a discount to take account of its lack of profitability.

Compare and Contrast

If you’re considering bootstrapping your own startup – or extending your business empire – it’s worth looking at whether acquiring a failing business may be more cost-effective than starting from scratch. If all you’re really interested in is getting your hands on new premises in the right location, for example, a failing business could turn out to be the most affordable way of annexing a coveted lease in a retail hot-spot or buying essential equipment and stock at a heavily discounted price.

Buyer’s Checklist

  • What's wrong with the business – why did it fail?
  • Can it be fixed – how?
  • Why do you want to buy it?
  • Is the price right and is the turnaround affordable?
  • How long will it be till it turns a profit?

Understand the Risk

No business acquisition is risk-free but buying a failing business escalates the odds. While many businesses fail for legitimate reasons, sometimes it’s because the proposition simply isn’t viable. Make sure you understand what the real cost of buying is and solicit advice from trusted professionals before you jump in with both feet.

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