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Buying a distressed business is a frightening endeavor, but those skilled with knowing how to turn an operation around, or operated within a specific industry can find a great deal of upside. Knowing what to look for in a distressed business and what to expect will give you all the advantage when purchasing a failing business. We will explore a few of the things you should expect to see.
- Buying a failing business can be a great opportunity for owners who are skilled in identifying potential and capitalizing on it
- Once you’ve bought the business the real work starts, execution is everything when it comes to buying a distressed business
- With a long term mindset buying a failing business might create a great short term deal for hard working owners
Why Buy a Failing Business?
If you have an ability to turn an operation around, deep knowledge in a specific business area, or see opportunity in a distressed business you might be a candidate for buying a failing business. There are many reasons to buy a failing business but most are pursued with the idea that in the future they will generate a positive return.
Step-by-Step Guide to Buying a Failing Business
There are many steps that can be taken to purchase a distressed business but a typical framework can be found below;
- Identify candidates - Find and research company which might be failing, whether locally or on online marketplaces to determine which businesses align with your goals and what type of deal they may be open to
- Assess the business - once you’ve identified a business, work to understand what type of potential exists in the market or industry which the business operates. Doing the diligence here will ensure you’re making the best decision as a buyer
- Determine acquisition strategy - once you are set on a business, determine whether you’ll be using a business acquisition loan, or family and friend, or even personal financing to close the deal
- Purchase the business - The final step is to move through the business purchase process and close the deal
Buying a Failing Business: Is It Worth It?
Pros of Buying a Failing Business
Buying a failing business might allow owners to purchase an asset at a discounted rate given the current condition of operations. It may also present a clean slate, or new eyes, for an owner with operational skill to come in and apply knowledge to maximize and improve business health, yielding the desired reward for the buyer.
Cons of Buying a Failing Business
A business might be failing for a reason that an outside party might not see; whether its operating with a failing product, or errors exist in its intellectual property, there is a lot to discover about a business once you take ownership.
You may also lose things like best practice, loyal customer bases, or market share when taking over a business; these uncontrollable events are hard to forecast and buyers of a failing business should be aware of the inherent risk.
Tips to Help You Find a Failing Business to Buy
It is not easy to find a failing business which can be purchased. You can use online marketplaces like flippa.com, or shop locally asking business owners, although you may find less success. Getting an idea for the type of business you’d like to buy, and seeing real examples of what is for sale, and for how much will give you a great anchor to understand what to expect.
What to Look for When Buying a Failing Business
The type of business you want to buy should align with your interests, what you’re good at, and how much risk you believe the business will bring to yourself as the owner. Weighing these attributes should allow you to understand and target certain types of businesses to look at acquiring.
Questions to Ask Before Buying a Failing Business
You will want to ensure that any potential businesses you are looking to purchase do in fact meet your list of criteria. This could mean that they are for sale at a price which you’d be willing to pay, or that the operation of the business services a specific target customer you are also looking to target. These traits of the business should align with your expectations to ensure a long term fit that will continue to bring success to the business.
How to Turn Around a Failing Business You’ve Bought
There's no clear and direct way to operate a failing business after you’ve closed the sale. You will spend time learning and improving and iterating until you find success. Here are a few tips.
What to Do After Buying a Failing Business
The first few months you may want to spend time familiarizing yourself with the business, its processes, technology, and people to get a read on the current state. From here owners can strategize the future state and understand what will need to be done to bring the business to where you desire.
How to Fix the Problems that Caused the Business to Fail
If there are root causes that are causing the business to fail you will want to identify and remediate those. These could be things like a faulty product, lack of marketing, whatever it could be, the identification would be the first step.
From there the business would need to address these to turn the operation around and begin yielding a result more in line with the forecast put in place.
How to Make the Business Profitable Again
Once a business owner understands the operation and has planned for the next step which includes the strategic improvements, execution is key. Following the plan set out and compare against your results often to continue making changes along the way to profitability.
Buying a struggling business is not always a bad idea. Utilizing things like SBA loans and business acquisition loans an owner can get access to funds needed to purchase a failing business and apply their knowledge to maximize the potential. This can yield a great reward for savvy owners but comes with its own set of risks. Research, patience, and knowing what to expect when buying a failing business will make all the difference for potential owners