Are you about buying a failing business? If YES, here are 7 smart tips on how to buy a business that is in debt and losing money without burning your fingers.
Module 6-: With most countries facing varying degrees of economic turbulence, more and more business owners are keen to offload their businesses as soon as possible.
Apart from harsh economic conditions, there are other reasons why many small businesses all over world are in distress. These include poor management practices, lack of funds for business sustenance, fierce competition, and many others.
However, as ever in business, the woes of some people will create opportunities for others. While many entrepreneurs are making the hard decision to let go of their businesses, others are ready to snag up distressed businesses at knockdown prices.
If you are looking to break into a new market, one of the smartest ways to do that without starting from scratch is to buy a distressed business operating within that market. If you know how to play your cards right, this acquisition can turn out to be your best business decision ever.
Buying a distressed business is not as easy as it sounds. There’s much more to the process than scouring your locality or the internet for businesses that are unable to move on and then contacting the seller to complete the acquisition process.
Rather, identifying, assessing, and completing the purchase of a distressed business can be daunting process, presenting a number of risks and potential problems not always found in a traditional acquisition. So, how can you successfully buy a business that is in debt and losing money? Read on to understand the steps involved.
How to Smartly Buy a Business That is in Debt and Losing Money
1. Prepare for the acquisition
Your first step towards the successful acquisition of a distressed business is to prepare well. You need to define your goals and objectives as well as specify which criteria you are looking for in prospective target companies. It goes without saying that you need to understand what you want to buy before going to look. So, you need to create a detailed plan.
Your objectives should be clearly articulated and well documented. Similarly, criteria such as size of the deal, type of business, profit potential, funds required for full resuscitation, and other considerations should not only be put into writing, but also ranked according to their importance to you.
Many investors become so eager to buy a ‘promising‘ distressed business, they fail to apply common sense or consider their criteria before rushing to complete the acquisition. This usually happens because the target company is selling for an incredibly low price or they are afraid of losing the opportunity to someone else.
Putting aside your goals, objectives, and criteria can be a huge mistake. If a distressed company does not meet your expectations, chances are there that it will underperform in the short or long term. And this mistake can make your acquisition one of your worst decisions as an entrepreneur.
2. Perform due diligence
When purchasing a distressed business, you can easily get tempted into forgoing certain aspects of due diligence; but giving in will be another huge mistake. Doing proper due diligence and knowing exactly what you are buying are important measures to detect present issues with the business as well as prevent unexpected, but foreseeable, problems that may spring up later.
In addition to the financial records, all other aspects of the business must be checked during the due diligence check. These include suppliers, customer relationships, operations, management and ownership, equipment and assets, and employees.
If your target business operates on the manufacturing model, you need to address its relationship with suppliers during the due diligence phase. This will help you decide whether you will leverage existing relationships, establish new terms with current suppliers, or find new suppliers.
Since customers are the most important asset of any business, you also need to evaluate customer relationships. This is usually not easy, though.
Most distressed businesses have strained customer relationships due to supply disruptions or negative public perception. In any case, you need to understand the reason begin such strained relationships and see if you can turn things around when you take over.
You also need to analyze the business’s employees, since they are the backbone of the business. When a business is in distress, employee morale can be destroyed quickly.
Most of the time, employees in distressed companies have forgone pay raises and have been asked to take on more responsibility due to layoffs. So, you need to be aware of the employee situation and make plans to address the shortcomings.
During the due diligence process, be sure to check every aspect of the business. Don’t downplay any aspect, as this can cost you a lot in the future.
3. Complete the acquisition
Once you are satisfied with the results of the due diligence, kick-start the funds transfer process based on the preferences of the seller.
Be sure to involve an attorney and sign legal documents that will transfer the ownership of the company to you immediately after completing the payment. Transfer the money to the seller as per your agreed-upon terms, and you will become the new owner of the business.
10 Do’s and Don’ts for Buying a Business That is in Debt and Losing Money
Buying an established business is a smart way to break into your dream market. You get to bypass all the intricacies and hassles that come with starting a new business from scratch. And you can start making money right away, since the business is already popular and has built a large pool of loyal customers.
Buying a business is a critical and crucial decision with significant long-term repercussions. It can be the best decision you will ever make in your life, and it can be your most regrettable decision—depending on what happens after you make it.
To ensure that your decision to buy a business turns out positive and successful—not disappointing and frustrating—you need to follow these 10 tested do’s and don’ts of buying a business.
a. Ask why the seller wants to let go
It’s counter-intuitive for anyone to let go of a business that took him years to build from scratch and grow into an established brand.
This explains why the decision to sell a business is, by default, a questionable one. So, before going ahead to buy a business, ask the seller why he wants to sell the business. Whether it’s bankruptcy, fierce competition, retirement, loss of interest, or recurrent losses, the seller’s reason can help you make a good decision about whether to buy the business or not.
b. Ensure due diligence
Many entrepreneurs are so much excited about the idea of buying a new business that their common sense flies out of the window. They rush into the buying process without carefully studying the business, and they end up getting badly burned.
So, it is very important that you take your time to scrutinize every aspect of a business you intend to buy before sealing the deal. This will help you see both the light and dark sides of the business before proceeding with the deal. And it will help you make a well-informed decision in the end.
c. Don’t buy an ‘abstract’ business
While most sellers will readily provide you with paper documents showing various details and records about their business, don’t bank only on those.
Visit the location of the business to get a feel of how it operates both from the perspective of an investor and that of a customer. Check the equipment during operation, look at the staff, and compare your findings with what the seller has presented on paper. If you sense any inconsistency, that’s a red flag!
d. Don’t invest in what you don’t understand or are not familiar with
If you don’t know anything about the type of business you are investing in, no amount of due diligence can help you make a good decision. Worse, after buying the business, you will be running it as a newbie—and that could be disastrous.
Even if you don’t plan to manage the business yourself, having some understanding of the business and its primary principles will help you immensely in the long haul.
e. Have a top price in mind
One of the commonest mistakes investors make when buying a new business is to stretch beyond their financial limits just to have the business at all cost. Unfortunately, then wind up crashing the business because they cannot afford the costs of managing and maintaining the business.
So, before buying a business, you must have a top price in mind. And you must set aside some extra funds for the maintenance of the business after the acquisition.
f. Check how vital the seller is to the business
Some business owners are so integral to their business that it cannot survive without them. If the seller spends almost all the time working on the business, you need to be suspicious. If the reasons for this are that the employees cannot be trusted or he’s just a workaholic, then his exit shouldn’t cause any problems. But if you discover that “he is the business itself”, just hit the dirt!
g. Ask the seller to stay on board for some time
Taking over a new business is not like buying a new car and driving it. After buying a new business, you will need the seller to stay on for a while to transfer his knowledge and experience of the business to you and to help you make vital business decisions. If a seller shows some reluctance to stay back, that’s another red flag—he might be hiding something.
h. Ask the for seller financing
Even if you have enough cash to buy the business outright, ask the seller to provide some of the funds you need for the acquisition. This will give him an incentive to transfer his knowledge (he has a very good reason to help you succeed because he wants you to get the balance of his money).
And if you are getting seller financing because you really need it, you will surely get better payment terms from the seller than you will get from a bank or other financial institution.
i. Don’t buy without the future in mind
Before buying a new business, consider what will most likely become its fate in future. Is the business selling a product or service that will lose its relevance with time? Is the business utilizing some technology that will evolve with time? Getting answers to these questions will help your decision.