Distressed businesses exist in every industry. Some can be great opportunities, especially if they can be purchased for a low price and infused with capital and managerial knowhow to realize significantly improved outcomes. Others should be avoided at all costs.
In this article, we’ll help you make an informed decision about whether these risky opportunities belong in your ownership portfolio.
What causes a business to become distressed?
Businesses can become distressed for many reasons. Sometimes, it’s that they’re poorly managed. Others are overburdened by debt or need an infusion of capital to market, redesign their products, or update their systems or critical machinery. Still others become distressed because of poor market conditions or changing buyer preferences.
For prospective buyers, the reason for a business’s distress matters a great deal. Some causes may be difficult to overcome; some impossible. But you may find that others can be navigated with specific forms of knowhow, capital, and involvement in the business.
How can I tell if a distressed business has value?
Due diligence will help you assess whether a distressed business is worth the time, energy, and resources you’ll put into it. Through the due diligence process, you’ll look for signs of value—and vitality—that can be developed to bring life back to the business. These signs could include a loyal and diverse customer base, high-caliber employees, or capabilities that other firms don’t have.
You’ll also need to pinpoint why the business is distressed. To do this, you'll need to look beyond the obvious symptoms the business is experiencing and try to find the source of its biggest issues. You'll achieve this by examining the business’s financial documents and talking with the management team, employees, customers, and others to understand the full picture.
Once the root of the problem is uncovered, you might see how you can restore the business’s financial, legal, or reputational health. If you can find solutions that are reasonable and attainable, are financially sound, have favorable odds of success, and can help you to address the core problem and its emerging symptoms, you might be inclined to make a purchase.
|If the problems seem too big to take on, consider another tactic: Look into buying the business's high-value assets, including its customer lists, intellectual property, or a profitable division, rather than the entirety of a business. |
This smart move can help you avoid assuming the business’s unwanted liabilities, but it can also introduce some tax concerns that you’ll need to weigh before proceeding. A tax attorney can help you to understand the risks and benefits.
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How do I find distressed businesses?
Few businesses will announce their distress, but there are some strategies that can help you find businesses worth investigating:
- Pay attention to changes in industry trends, costs of inputs, legislation, tariffs, licensing requirements, and prevailing ideas, and identify businesses that may be suffering because of them.
- Talk to lenders, customers, suppliers, competitors, and others in your target industry to keep up to date on who’s performing well and who’s struggling to stay afloat.
- If you already own a business, talk to your vendors and suppliers. Some may be facing insurmountable problems in parts of their business and be open to an acquisition. Consider any option that could be valuable to your operations, save your business money, or boost your business’s performance.
Guidance for moving forward
There are lots of risks with buying a distressed business. Be sure to speak with an attorney who can help you understand the liabilities, judgments, and recourses of a distressed business and work through the complex process of acquisition, which might include negotiating with the business and its creditors, equity holders, bondholders, landlords, and others.
An accountant will be an important part of your acquisition team, too. Lean on your accountant’s expertise to evaluate the business’s debt and taxation issues, examine revenue streams, and help you to determine the right offer price for the business.
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Is there anything else I should know?
Financing a distressed business can be more complicated than financing one that’s solvent. Traditional means of funding, including bank loans and SBA loans, may not be available to you. However, you may be able to arrange seller financing or an earnout scenario that’ll help you reduce your upfront costs of purchase. You can work with your attorney or accountant to model these scenarios and determine the option that’ll work best for you. You can learn more about these options here:
Whether you choose to buy a distressed business or purchase one that’s financially solvent, you’ll need to follow a specific series of steps to make your acquisition a success. We can help you with every part of this process. Log into your owner’s portal for free articles and advice to source and analyze businesses, negotiate terms, and complete your acquisition.