When Buying a Failing Business Does and Doesn’t Make Sense

Current financial records are a strong indicator of a business’s viability. It’s deterring when cash flow and profits aren’t high, or worse, failing, but contrary to how this may seem, these types of businesses could still be worth the investment.

Here’s how to tell when buying a failing business could be a smart move and when you should keep moving forward in your search.

A Potential Gold Mine or a Hopeless Situation?

At the end of the day, what matters most is the existing business’ potential. And that applies whether it’s performing well or not. So, how can you tell whether you have a good opportunity on your hands or if it’s time to go a different route? Let’s discuss.

When You Might Buy a Business That Is Losing Money

1. Many businesses have had a hard time staying afloat since the pandemic. The market and consumer trends are changing, so you should consider whether this industry could be on an upswing as we settle into life post-COVID-19.
2. A successful competitor can set a business back. Perhaps the current business owner lacked the marketing strategies, creativity, or willpower to stay in the running.
3. Building off that last point — it takes money to make money. The current owner may not have been able to keep up with rising real estate costs, material costs, etc.
4. Was the business struggling because it was mismanaged or didn’t have the right resources? Some restructuring may be enough to fix that.
5. Perhaps a business isn’t targeting the right audience. Could it be successful if they opened up to a national customer base? Or should they focus more on local business?

When It May Be More Challenging to Take Over a Failing Company

You may want to avoid buying a business that is struggling for any of these reasons:

• The product or service is obsolete or unwanted
• Poor or controversial reputation
• Permanent changes to demographics
• Significant liabilities like adverse judgment or product liability claims
• Overburdened with debt

How to Buy a Failing Business and Make It Successful

We’re seeing the business buyer/entrepreneur pendulum swing towards distressed businesses as a result of troubling market conditions. Even with the right business plan and working capital, you’re still going to be up against many odds.

You’ll want to conduct rigorous analysis. Depending on where the issue lies, you’ll want to speak with a business broker, legal counsel, and a financial advisor to make sure you understand what’s at stake. From there, you can make your decision. You’ll have to know how to say no and when to walk away.

Turning around a struggling business often involves restructuring, rebranding, and a lot of capital. It may take longer than usual to see a return on your investment, but if you see the potential, you may want to chase it still. A new owner could mean a totally new business! But, it could also mean insolvency. Doing your research is imperative.

If you’ve found the right opportunity and are ready to roll up your sleeves, Sunbelt Business Brokers is here to support you. Or, if you are interested in finding an opportunity with a low purchase price that has the potential to grow, we can help you in your search. Contact your local Sunbelt office to discuss your plans!